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State & Local Tax Update - 4/22/15

Posted 7:58 PM by

2015 Indiana Real Property Tax Bills

Many Indiana counties have begun mailing property tax bills for 2015. The spring 2015 tax bill will be due Monday, May 11. The 2015 tax bill is calculated based upon the March 1, 2014, assessed value.

This is the perfect time for property owners to review their assessed value and tax bill for accuracy. The assessed value should be representative of market value. One way to determine if your assessed value is accurate is to ask, "Could I sell my property for the assessed amount?" If the answer is no, then there is still an opportunity to appeal your assessed value in many counties.

KSM’s property tax professionals would be happy to review the assessed value of your commercial property in order to determine whether an appeal should be filed. For assistance, contact your KSM advisor or KSM property tax leader Chad Miller as soon as possible. Or, use KSM's property tax savings calculator to calculate your potential savings.

 
 

Indiana Real Property Exemption for Early Childhood Education

Effective Jan. 1, 2015, IC 6-1.1-10-46 has been added to reflect a new real property exemption for early childhood education providers. The exemption applies to tangible property owned, occupied or used by a for-profit provider of early childhood education. If the provider provides educational services to children who are at least 4 but less than 6 years of age and meet certain requirements, they may qualify for a property tax exemption on their property.

Indiana Issues LOF Interpreting Cost of Performance Rules

The Indiana Department of Revenue (IDOR) ruled that a taxpayer's application of the cost of performance methodology to its income derived from providing services to local restaurant stores was inappropriate. The Minnesota-based taxpayer franchises its restaurant store business in various states, including Indiana; however, the taxpayer does not own any of its local restaurant stores.

The taxpayer supports its franchisees' retail business by managing and marketing intellectual property rights, as well as providing centrally located administrative functions, including accounting, finance, marketing, data processing and numerous other functions; royalties are collected from its Indiana franchisees for the right to use the intellectual property, trademarks and trade names in the franchisees' retail businesses, and the taxpayer receives income from training and consulting services offered to the locally owned stores.

The taxpayer applied the cost of performance methodology to its apportionment, arguing that the majority of the income producing activity performed in conjunction with its franchisees located in Indiana occurs in another state, and that its method of apportionment fairly reflects the taxpayer's income in Indiana.

The IDOR disagreed, finding that the taxpayer's services were rendered in Indiana because Indiana is the location where the franchisees purchased the taxpayer's services. Further, the Department concluded the cost of performance method is only relevant if the Department attempts to apportion income-producing activity performed both within and without Indiana, or if a corporation has income from services or other intangibles and it is not possible to identify the market for services or other intangibles. In this instance, the locations of the costs associated with services can be identified. See LOF 02-20130402 for more information.

Maryland to Offer Amnesty Program

Both the Maryland House of Delegates and Maryland Senate have passed companion bills providing for a tax amnesty program. Pending signature by the governor, the amnesty would provide an opportunity for delinquent taxpayers to get current with taxes without being penalized or paying interest on the liabilities. The program is set to run from Sept. 1, 2015, through Oct. 30, 2015.

Massachusetts Amnesty Underway

From March 16, 2015, through May 15, 2015, Massachusetts is offering a tax amnesty program. Eligible taxpayers will receive a notice from the state of Massachusetts and, if the liability is timely paid during the amnesty period, the state will waive penalties. See Massachusetts Department of Revenue’s FAQ page for additional information.

Michigan Enacts Click-Through Nexus Provisions

Effective Oct. 1, 2015, sales tax nexus can be established via a “click-through” relationship with an Internet vendor. Specifically, a seller of tangible personal property is presumed to be engaged in the business of making sales at retail of tangible personal property in this state if the seller enters into an agreement, directly or indirectly, with one or more Michigan residents under which the resident, for a commission or other consideration, directly or indirectly, refers potential purchasers, whether by a link on an Internet website, in-person oral presentation, or otherwise, to the seller, if the referrals result in greater than $10,000 of receipts and the total Michigan receipts of the taxpayer are greater than $50,000. See MCL 205-52b for more information.

About the Author
Donna Niesen is a partner in Katz, Sapper & Miller’s State and Local Tax Group. Donna helps keep clients up-to-date on the multitude of tax rules and requirements in all 50 states. She guides them in the right direction as they address the complex issues that emerge on both the state and local levels. Connect with her on LinkedIn.

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State & Local Tax Update: 3/5/15

Posted 8:16 PM by

Potential Changes to Indiana Assessing Special Use Properties

Property taxes are getting a lot of attention in this year's Indiana legislative session. KSM's State and Local Tax Practice is tracking a handful of bills under consideration that could directly affect our clients, including SB 436, which is a bill that attempts to change the way Indiana assesses first-generation special use properties.Special use properties could include, but are not limited to, buildings of 50,000 square feet or more (commonly referred to as big box stores), fast food restaurants, national retail drug stores, and industrial properties. The draft bill is indicating that the market value-in-use for these type of properties should be derived from applying the cost approach to the buildings and adding the land cost to that value. This new method could have an impact on the way Indiana assesses first generation special use properties.

This legislation is in response to two recent Indiana Board of Tax Review decisions:

Meijer Stores LP v. Marion County Assessor and Kohl's Indiana LP v. Howard County Assessor.

In these decisions, the Indiana Board of Tax Review (IBTR) ruled that the county assessor must reduce the assessed value for all years under appeal to the appraised valuation that Meijer and Kohl's submitted. In both cases, each party submitted appraisals and the IBTR ruled in favor of the taxpayer. The taxpayers' appraisals used sales and rental information of second generation stores. Some of the comparable stores were vacant (dark boxes) at the time of the sale but the sales comparisons were used to value an operating store. Both of these decisions are being appealed to the Indiana Tax Court, so their permanent impact is in limbo. In the meantime, SB 436 is a legislative attempt to statutorily resolve the issues raised in these decisions regarding comparing operating stores to dark boxes. 

If you have any questions regarding SB 436 or how this could affect your property, contact Katz, Sapper and Miller's property tax leader, Chad Miller, or state and local tax manager, Heather Judy. We would be happy to discuss this with you.
 

Indiana Tax Court Rules Company Not Creating New Product; Not Entitled to Manufacturing  Exemption: A manufacturer of cryogenic tanker trailers was denied a sales tax exemption on utility consumption related to the rehab portion of its business. Although taxpayer produced new trailers, a portion of its business was related to rehabilitating/refurbishing used tanker trailers that were forced out of service because they could no longer hold a vacuum. The Court determined that the rehabilitation portion of the business was taxable repair activity and not exempt manufacturing activity because it did not meet the four-pronged test set forth in Rotation Products. See Alloy Custom Products,Inc. v. Indiana Department of Revenue for more information.

Massachusetts to Offer Amnesty Program: Governor Baker recently signed H52 , which includes a provision to allow a 60-day tax amnesty program. The parameters of the program will be set by the Commissioner of Revenue but must include provisions to abate penalties for taxes paid under the amnesty program and must create a method to prevent any taxpayer utilizing the amnesty program from utilizing any future amnesty programs for the next 10 years.

Missouri Court Finds Franchise Tax Nexus Via LP Interest: A taxpayer was engaging in business in Missouri and subject to the Missouri franchise tax because it had employed its assets (its interests in an LP that was doing business in the state) in Missouri. In making its decision, the Court concluded that for purposes of deciding whether the corporation was subject to franchise tax, it does not matter whether the corporation engaged in business in Missouri by employing a wholly owned limited partnership or whether it engaged in business in the state by employing the LP's assets directly. See Southwestern Bell Telephone Company v. Director of Revenue for more information. 

New York Approves Grants to Investigate Tax Evasion: Governor Cuomo recently announced that 28 district attorneys' offices will receive more than $14.7 million in grants to enhance their investigation of state tax evasion and welfare fraud cases. The grants are funded via New York's Crimes Against Revenue Program. The grants will fund investigations of sales, excise and income taxes; focusing on individuals, corporations or industries and will include complex financial fraud and tax evasion schemes by major criminal enterprises. See 2-19-15 Press Release for more information.

Tennessee Issues Ruling on 338(h)(10) Election: The Tennessee Department of Revenue has issued a letter ruling that discusses the effect on Tennessee excise tax of making a Code Sec. 338(h)(10) election when an S corporation is sold. S corporation shareholders sold all of their stock in the S corporation to a purchaser and both parties made the Code Sec. 338(h)(10) election to treat that sale as a deemed sale of assets. In addition to the payments due for the stock at the time of the purchase, the shareholders were also due earnout payments if the performance of the corporation exceeds certain thresholds. The Department stated that the selling corporation must include the gain from the deemed sale of assets in its taxable income in the same tax year that those gains were recognized for federal tax purposes. The Department also stated that although the earnout payments will be made to the former shareholders of the S corporation and not to the corporation, those payments must be included in income by the corporation on federal Form 1120S and must be included in taxable income for Tennessee excise tax purposes in that same tax year. See Letter Ruling14-15  for more information.

Texas Rules Fuel Surcharge Reimbursements Are Deductible From Total Revenue: The Texas Comptroller has ruled that a freight transporter reporting under a reimbursement theory for federal purposes was allowed to exclude fuel surcharge reimbursements from total revenue and deductible expenses in calculating its Texas franchise tax. In this case, since the taxpayer excluded the reimbursements from both revenue and deductible expenses on its federal income tax return, the federal gross receipts reported on Line 1c of the federal return was properly included in its total revenue calculation on the Texas franchise tax return. See Decision 107,457 for more information.

About the Author
Donna Niesen is a partner in Katz, Sapper & Miller’s State and Local Tax Group. Donna helps keep clients up-to-date on the multitude of tax rules and requirements in all 50 states. She guides them in the right direction as they address the complex issues that emerge on both the state and local levels. Connect with her on LinkedIn.

 


 

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Standards Updates - 2/24/15

Posted 1:00 PM by
 

Accounting Standards Update 2014-18
Business Combinations (Topic 805): Accounting for Identifiable Intangible Assets in a Business Combination

In its last Accounting Standards Update (ASU) for 2014, the Financial Accounting Standards Board (FASB) continued to provide alternatives for private companies with the Private Company Council (PCC) consensus, which describes an alternative that permits an entity to avoid separate recognition of certain intangible assets acquired in a business combination. ASU 2014-18 was issued in December 2014 to address concerns from users of private company financial statements indicating that the benefits of separate identification of certain intangible assets may not justify related costs.

A private company electing to apply the accounting alternative provided under ASU 2014-18 should no longer recognize customer-related intangible assets (unless they are capable of being sold or licensed independently from other assets of the business) or noncompete agreements separately from goodwill when accounting for a business combination. Thus, when elected, fewer intangible assets will be identified separately in the financial statements.

If this accounting alternative is elected, the entity must also adopt the private company alternative to amortize goodwill provided under ASU 2014-02, Intangibles—Goodwill and Other (Topic 350): Accounting for Goodwill. However, the accounting alternative described in ASU 2014-02 may be elected without applying ASU 2014-18.

The decision to elect the accounting alternative described in ASU 2014-18 must be made upon the occurrence of the first transaction within its scope in fiscal years beginning after Dec. 15, 2015. Early application is permitted for any financial statements not yet available for issuance.

 

Accounting Standards Update 2015-01
Income Statement - Extraordinary and Unusual Items (Subtopic 225-20): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items
  

In January 2015, FASB issued ASU 2015-01 as part of its effort to reduce complexity in accounting standards. This update eliminates the concept of extraordinary items from accounting principles generally accepted in the United States (GAAP), thus simplifying income statement presentation requirements. Previously, entities were required to separately classify, present and disclose events and transactions meeting the criteria (both unusual in nature and infrequent of an occurrence) for extraordinary classification. ASU 2015-01 reduces complexity as preparers of financial statements will no longer need to assess events or transactions to determine whether they are or are not extraordinary items under GAAP.

Although the amendment eliminates the requirements for entities to consider if an event is extraordinary, there are presentation and disclosure requirements. Those events that are unusual in nature or occur infrequently, or both, are required to be presented as a separate component of income from continuing operations or disclosed in the notes to the financial statements.

The update is effective for fiscal years beginning after Dec. 15, 2015. The amendments may be applied prospectively or retrospectively for all prior periods presented. Early adoption is permitted.

 

Accounting Standards Update 2015-02
Consolidated (Topic 810): Amendments to the Consolidation Analysis
 

Stakeholders have expressed concerns to FASB that, in certain instances, GAAP would require a reporting entity to consolidate another entity, when the reporting entity does not have contractual rights providing the ability to act primarily on its own behalf, does not hold a majority of the entity’s voting rights, or is not exposed to a majority of the entity’s economic benefits or obligations, thus not providing useful information about the reporting entity’s results. To address those concerns, FASB previously issued an indefinite deferral for certain entities. ASU 2015-02, which was issued in February 2015, rescinds the deferral and makes changes to the consolidation guidance.

ASU 2015-02 affects reporting entities required to evaluate whether they consolidate certain legal entities and will require a reevaluation to determine what entities are consolidated. The ASU modifies the process used to evaluate whether limited partnerships and similar entities are variable interest entities (VIEs) or voting interest entities and affects the analysis performed by reporting entities regarding VIEs, particularly those with fee arrangements and related party relationships, and provides a scope exception for certain investment funds.

Limited Partnerships and Similar Legal Entities

Three main provisions of ASU 2015-02 affect limited partnerships and similar legal entities. The guidance adds a requirement that limited partnerships must provide partners with either substantive kick-out rights or substantive participating rights over the general partner to qualify as voting interest entities. The guidance also eliminates the presumption that a general partner should consolidate a limited partnership. Finally, for limited partnerships that do qualify as voting interest entities, a limited partner should consolidate when the partner has a controlling financial interest, which may be achieved through holding a limited partner interest that provides substantive kick-out rights.

Evaluating Fee Arrangements

Currently, six criteria are used to determine whether fees paid by an entity to a decision maker or service provider represent a variable interest in the entity. If the fees paid are determined to represent a variable interest, the reporting entity must evaluate whether the interest represents a controlling financial interest, and, if so, requires consolidation of the VIE. The update eliminates three of the six criteria used in this analysis. Additionally, the update specifies that some fees paid to a decision maker are excluded from the evaluation in determining whether the interest represents a controlling financial interest if the fees are both customary and commensurate with the level of effect required to provide the services.

Related Party Relationships

Under current GAAP, when no single party has a controlling financial interest in a VIE, interests held by a reporting entity’s related parties are treated as though they belong to the reporting entity when determining the primary beneficiary of the VIE. The ASU reduces this application by requiring that related party relationship first be considered indirectly on a proportionate basis, rather than in their entirety. After this assessment is performed the analysis is complete, except in two situations. The related party relationships would be considered in their entirety when entities under common control collectively have a controlling financial interest. If this is not applicable and substantially all the activities of the VIE are conducted on behalf of a single variable interest holder, excluding the decision maker, in the related party group, that single variable interest holder must consolidate the VIE.

Guidance related to situations in which power is shared between two or more related entities that hold variable interests in a VIE was not amended by this update.

The update is effective for public business entities for fiscal years beginning after Dec. 15, 2015, and all other entities for fiscal years beginning after Dec. 15, 2016. Early adoption is permitted. The amendments provided in the ASU may be applied using a modified retrospective approach by recording a cumulative-effect adjustment to equity as of the beginning of the fiscal year of adoption or applied retrospectively.

 

New Web Page Focused on Benefits of GAAP  

The Financial Accounting Foundation (FAF), which oversees the Financial Accounting Standards Board and Government Accounting Standards Board, has launched a new Web page that focuses on the importance of GAAP: www.accountingfoundation.org/gaap. The page explores the benefits of GAAP for all types of entities, public companies, state and local governments, private companies, and not-for-profits, describing GAAP as “the grammar and the punctuation” determining the language of financial reporting. The site provides a resource to all stakeholders of financial statements, particularly those not familiar with the benefits of GAAP.

About the Author
Amanda Horvath is a director in Katz, Sapper & Miller’s Audit and Assurance Services Group. Amanda provides a wide variety of services, including financial statement audits, reviews and consulting projects involving compliance, and internal control issues. Connect with her on LinkedIn.

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IRS Simplifies Small Taxpayer Compliance with Repair Regulations

Posted 9:12 PM by
With Revenue Procedure 2015-20, the IRS on Friday backed away from their mandatory requirement that all taxpayers apply the TPRs to prior years.
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Affordable Care Act Updates

Posted 3:22 PM by
 

IRS offers relief of penalties associated with excess advance premium credit

The IRS has provided a procedure to help taxpayers avoid late payment penalties if they are unable to repay excess advance payments of the Affordable Care Act (ACA)'s premium credit for the 2014 tax year by the due date of their 2014 return. Taxpayers facing penalties for the underpayment of estimated taxes attributable to those excess payments can also get relief.

Taxpayers can qualify for these abatements if:

  1. They are otherwise current with their filing and payment obligations; and
  2. They report the amount of excess advance credit payments on their timely filed 2014 tax return, including extensions.

Taxpayers facing the late-payment penalty must also have a balance due for the 2014 tax year due to excess advance payments of the premium tax credit.

Taxpayers who are unable to repay the excess advance payments will receive a notice from the IRS in the mail. Taxpayers should write a letter to the address listed on the notice that contains the statement: “I am eligible for the relief granted under Notice 2015-9 because I received excess advance payment of the premium tax credit.”

To request an abatement of the underpayment of estimated tax penalty, taxpayers should check box A in Part II of Form 2210, complete page 1 of the form, and include the form with their return along with this statement: “Received excess advance payment of the premium tax credit.” Taxpayers do not need to complete any of the form’s other pages or calculate the penalty amount.

Individual Shared Responsibility Provision

Have you been wondering how the ACA will affect your 2014 tax return? For more than 100 million taxpayers the only additional step will be checking a box on Form 1040 indicating each member of their family had qualifying health coverage for the whole year. For those who had health coverage gaps or no coverage in 2014, however, it’s time to contact your tax professional.

For 2014, you may be exempt from the health coverage requirement if you meet certain criteria. Your tax professional can help you determine if you qualify for an exemption from the Individual Shared Responsibility provision.

It’s also important to correct the issue by enrolling in a qualifying health insurance program before the 2015 deadline. The open enrollment period for 2015 ends Feb. 15, and employers have until Feb. 2 to issue W-2s, so don’t wait until you receive your W-2 to talk with your tax professional or you could miss the deadline. The fee for not having health coverage is increasing from 1% of household income or $95 in 2014 to 2% of household income or $325 per person (maximum penalty per family is $975) in 2015.

Employers required to offer health plans or pay penalty

Originally, applicable large employers were required to comply with the Patient Protection and Affordable Care Act (ACA) after Dec. 31, 2013, but the IRS has delayed the tax for all employers until this year, 2015. For employers with 100 or more full-time equivalent employees, affordable minimum essential coverage must be offered to at least 70% percent of full-time employees in 2015 in order to avoid a penalty. Mid-sized employers (50-99) have until Jan. 1, 2016, to comply with the employer mandate without facing any Section 4890H penalties.

An applicable large employer must determine whether to “pay or play” (i.e., whether to offer a plan or not). This article is not focused on a pay or play analysis; rather, it is centered on a different and distinct excise tax. This excise tax is assessed if any employer, whether required or not, offers a group plan that does not provide for minimum essential coverage. The excise tax is $100 per day per individual to whom the failure relates.

Non-integrated health reimbursement arrangements are not considered to provide minimum essential coverage

A common plan offered by employers is a health reimbursement arrangement (HRA). An HRA is an arrangement that is funded solely by an employer which reimburses an employee for medical care expenses. HRAs are generally considered to be group health plans under the Internal Revenue Code. An HRA on its own does not constitute minimum essential coverage under the ACA even if the HRA reimburses for outside plans that would normally constitute minimum essential coverage. An employer may, however, offer an HRA in combination with other coverage and satisfy the requirement to offer minimum essential coverage. This is known as an integrated HRA.

In order for an HRA to be integrated, it must only be available to employees who are covered by the primary group health plan that is provided by the employer and satisfies the annual dollar limit prohibition. A plan violates the annual dollar limit prohibition if the plan sets a maximum dollar amount allowed for covered benefits.

The IRS issued guidance in Notice 2013-54 that explains that an HRA cannot be used in conjunction with the individual marketplace to comply with the employer mandate. Since an HRA is considered a group health plan, this arrangement will run afoul of the annual dollar limit prohibition. Employers offering a group health plan must provide minimum essential coverage or the employer will be subject to an excise tax of $100 per day per individual to whom the failure relates.

Employers should seriously consider the consequences of failing to offer a group health plan that constitutes minimum essential coverage. Both small and large employers should confirm with their benefits advisor that the plan(s) offered provides minimum essential coverage. If an employer fails to offer a group health plan that encompasses all of the minimum essential coverage requirements, the employer is subject to an excise tax of $100 per day per individual to whom the failure relates. In other words, an employer can face a maximum of $36,500 each year per employee for failing to offer a compliant group health plan.

In addition to non-integrated HRAs, there are a plethora of other mandates that can trigger the $100 per day per individual to whom the failure relates:











If an employer offers a plan that is not complaint with these requirements, there may be steps that can be taken to avoid or reduce potential excise tax. Contact your KSM advisor to review your specific situation and determine any corrective actions that may need to be taken.

If you have any questions concerning how these updates affect your tax situation, please contact your KSM advisor.

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State & Local Tax Update: 1/14/15

Posted 6:22 PM by

Personal Property Tax Compliance

Many states impose a personal property tax, and compliance due dates are fast approaching. Because most states do not have the same assessment date or due date, it is essential that you are familiar with each state's deadlines, especially if your company holds assets in different states.

Property taxes often comprise more than 40% of a company's state and local tax burden, but many businesses over-report their personal property taxes due to errors, missed exemptions and other common mistakes. Now is a good time to review your filings for possible exemptions and clean up your fixed asset report for items that have been disposed.

If you would like assistance with your personal property filings, contact Katz, Sapper and Miller's property tax leader, Chad Miller, or state and local tax manager, Heather Judy. We would be happy to assist you through this process.
 

California Releases Like-Kind Exchange Form: The 2014 California Form 3840 has been officially released by the Franchise Tax Board. This form will be used to comply with the like-kind exchange information reporting requirements effective January 1, 2014.

California Court Issues Ruling on "Doing Business" for LLC Members: The California Superior Court has issued a tentative ruling granting the taxpayer's motion for summary judgment. An Iowa corporation without business activities or physical presence in California challenged the imposition of the $800 minimum tax imposed as a result of the taxpayer having a membership interest in a California limited liability company. The Franchise Tax Board asserted that, as a member of an LLC that is treated as a partnership for tax purposes, the taxpayer was engaged in business in California. The court determined that the partnership status of an LLC applies only for the purpose of computing income tax. Additionally, the taxpayer's ownership share in the LLC was too small to have any impact on the management of the LLC or to control its business. (Swart Enterprises v. Cal. Franchise Tax Bd., Cal. Sup. Ct. (Fresno County), Dkt. No. 13CECG02171, 11/14/2014.)

California Court Rules Transfer of Interest in Legal Entity is Subject to Documentary Transfer Tax: The California Court of Appeals affirmed the judgment of the Superior Court after determining that state statute permits a documentary transfer tax when a transfer of interest in a legal entity results in a "change of ownership" within the meaning of Cal. Rev. & Tax. Cd. § 64(c) or Cal. Rev. & Tax. Cd. § 64(d). BA Realty, LLLP, owned 926 North Ardmore Avenue, LLC, a single member entity established to hold and manage an apartment building. In 2008, the owners of BA Realty sold approximately 90% of their partnership interests, 45% to each of two trusts, prompting the County of Los Angeles Registrar-Recorder to send a notice demanding that Ardmore pay a documentary transfer tax based on the value of the apartment building since the cumulative sale of more than 50% of BA Realty qualified as a "change of ownership" of the apartment building. Although Ardmore contended that a documentary tax may only be applied to "realty sold," which generally does not include sales or transfer of legal entities that hold
title to realty, in certain situations prior case law has interpreted the term "realty sold" to have the same meaning as the phrase "change of ownership" as used in property tax provisions. Because the transfer of a 90% interest in BA Realty qualified as a "change of ownership" of the property held by Ardmore, the transfer necessarily qualified as the "sale" of realty within the meaning of the Documentary Transfer Tax Act § 11911. As such, the County was permitted to impose a transfer tax under these circumstances. See 926 North Ardmore Avenue, LLC v. County of Los Angeles, Cal. for additional information.

Georgia Tax Tribunal Allows Texas Franchise Tax Deduction for Individual: The Georgia Tax Tribunal held that a Georgia taxpayer was entitled to make a subtraction adjustment from his federal adjusted gross income in computing his Georgia taxable income for indirect pass-through income from his ownership interest in a Texas limited liability company, which was subject to the Texas franchise tax, because the Texas franchise tax is a tax measured on or measured by income for purposes of the adjustment provision under Ga. Code Ann. § 48-7-27(d)(1)(C).  See Rosenberg v. MacGinnitie for additional information.

Michigan to Pay "Bonus Interest" on Refunds: Effective January 1, 2015, in addition to and separate from the regular interest added to a refund, for refunds for Michigan Business taxes, additional interest will be added to refunds that are not paid within 90 days after the claim is approved or 90 days after the date established by law for filing the return, whichever is later. This additional interest will be paid at a rate of 3% per annum for each day the refund is not issued within the time frame required, if certain conditions are met. See HB 4760 for additional information. 

Nebraska Issues Guidance on Owner-Operators: Nebraska Information Guide 6-512-2014 has been issued to assist in determining if an owner-operator is leasing a vehicle or acting as a common/contract carrier. Leases of vehicles may be subject to sales/use tax if certain exemptions are not met. 

Nebraska Issues Guidance on Market-Based Sourcing: Effective January 1, 2014, Nebraska will utilize a market-based sourcing method for apportioning sales of "other than tangible personal property." Market-based sourcing sources sales to the location where the market is (where the service is received or the intangible is used). Market-based sourcing does not require a specific percentage of the market to be in Nebraska. A Nebraska information release provides examples and definitions for this new rule.

Texas Rules Net Losses Are Includable in Sales Factor:  The Texas Court of Appeals has ruled that a company's losses on sales of investments and capital assets must be subtracted from gross receipts in determining the apportionment factor for Texas franchise tax purposes. Texas includes an entity's gross receipts, including net gain from the sale of investments and capital assets, in its apportionment factor. "Net gain" is an undefined term with multiple meaning. The comptroller's interpretation under 3.591 is the cumulative gain or loss on its various investment and capital asset sales made throughout the year. The court gave deference to the comptroller's interpretation deference because: (1) the plain meaning of "net" leads to the proper conclusion that net gain requires that gains and losses be offset against one another in order that a net figure be obtained; and (2) the comptroller's interpretation is reasonable. See Hallmark Marketing Co., LLC, for more information. 

Texas Rules In-State Software Creates Nexus:  The comptroller has ruled that an out-of-state  corporation that sells computer programs and digital content through the Internet to Texas customers must collect Texas use tax because it has created nexus via the recurring sale or licensing of software through downloads from the internet over a period of years that generated significant revenue in Texas, which constitutes substantial physical presence in Texas. Importantly, the retailer retained all rights in, title to and ownership of the downloaded software, which are controlled by license agreements restricting the customer's use. See Texas Comptroller's Decision 106.632 for additional information.

Virginia Taxes E-Delivered Software if Sold with Hardware: Charges for prewritten software and related services billed on the same invoice with taxable computer hardware and other equipment for a medical system were taxable even if the software was delivered electronically. While the sale of software delivered electronically to customers does not constitute the sale of tangible personal property and is generally not subject to sales and use taxation, the exemption only applies for services not involving an exchange of tangible personal property. In this case, although the software was delivered electronically, the software was part of the overall sale of taxable tangible personal property (the medical system) and was properly included in the taxable sales price of the system. See Virginia Public Document Ruling 14-178 for additional information.

Washington Determines Trailing Nexus Rule Valid: An out-of-state company having B&O nexus only through 2006 filed a refund claim with regard to B&O tax paid from 2007-2010. Under Washington's 2006 "trailing nexus rule" (Rule 194) nexus continued for an additional period, even if the nexus creating activity ceased. The Appeals Division of the Washington Department of Revenue denied the taxpayer's refund request, citing the above trailing nexus rule. See Washington Tax Determination 14-0104 for additional information.

About the Author
Donna Niesen is a partner in Katz, Sapper & Miller’s State and Local Tax Group. Donna helps keep clients up-to-date on the multitude of tax rules and requirements in all 50 states. She guides them in the right direction as they address the complex issues that emerge on both the state and local levels. Connect with her on LinkedIn.

 

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The Manufacturing Advisor: Tax Policy of Critical Concern to Manufacturers

Posted 2:25 PM by
Tax Policy of Critical Concern to Manufacturers: The 2014 Indiana Manufacturing Survey: Strong for Today, Concerned for Tomorrow was full of enlightening information for the Hoosier manufacturing industry, but one of the most striking pieces of information to come from the survey was this: When asked to select the most critical factor in terms of manufacturing cost and viability, property tax policy and corporate tax policy were rated extremely important by 66% of respondents, finishing . just a single percentage point behind regulatory issues and healthcare. And, in this day of 24/7 coverage of the Affordable Care Act, that’s saying something.
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Congress Passes "Tax Extenders" Legislation

Posted 9:21 PM by

Yesterday, the Senate passed the Tax Increase Prevention Act of 2014, also known as the "tax extenders" legislation. This bill now goes to President Obama for signature.

The "tax extenders" legislation extends more than 50 expired tax provisions retroactively to the beginning of 2014. These provisions have only been extended for 2014.

Two of the most significant provisions that were extended are bonus depreciation and Section 179 expensing.

  • Bonus depreciation allows for taxpayers to claim an additional first-year depreciation deduction equal to 50% of the cost of new assets placed in service prior to January 1, 2015. In order to qualify for bonus depreciation, the asset placed in service must be a new piece of tangible property.
  • Section 179 allows for taxpayers to expense up to $500,000 of the cost of qualified assets with an overall investment limitation of $2 million. To qualify for Section 179 treatment the asset must be depreciable tangible property or computer software which was acquired for use in a trade or business. Assets must be placed in service prior to January 1, 2015.

Other key business provisions that have been extended include:

  • The research credit has been extended.
  • The Work Opportunity Credit has been extended for employees who began work for the employer before January 1, 2015.
  • For corporations that converted from C to S status, the built-in gain recognition period is five years.
  • For S corporations making charitable donations of appreciated property, a shareholder's basis is adjusted by the cost basis of the asset instead of the appreciated value.
  • Certain excise tax credits for alternative fuels have been extended.

Key individual provisions that have been extended include:

  • The deduction for state and local income taxes in lieu of deducting state income taxes.
  • The above-the-line deduction for qualifying tuition and fees for post-secondary education.
  • The $250 above-the-line deduction for teachers' classroom expenses.
  • The exclusion from income from cancellation of mortgage debt on a principal residence up to $2 million.
  • The ability to contribute required minimum distributions from IRAs, up to $100,000, directly to charitable organizations. These distributions are not taxable.

If you have any questions concerning how these and other provisions affect your tax situation, please contact your KSM advisor.

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New FATCA Withholding Rules

Posted 2:20 PM by

The Foreign Account Tax Compliance Act (FATCA) imposes a new layer of withholding rules on U.S. persons making payments of U.S. source income to foreign entities. The FATCA withholding rules require a 30% nonrefundable withholding tax on certain payments of U.S. source income to foreign entities that fall within specifically defined categories. Payors of U.S. source income to foreign entities need to obtain the new Form W-8BEN-E from the foreign payee in order to document the payee’s FATCA status and substantiate exemptions from this withholding obligation. 

The requirement to document the status of each payee (U.S. versus foreign) is not a new requirement and was previously satisfied using the Form W-9 (for U.S. individuals and U.S. entities) or Form W-8BEN (for foreign individuals and foreign entities). The documentation procedures for U.S. persons and foreign individuals has not changed, and the Forms W-9 and W-8BEN are still used. However, the Form W-8BEN is no longer used for payments to foreign entities. The FATCA obligations now require U.S. payors to obtain the Form W-8BEN-E (or other W-8 series form if appropriate) from payees that are foreign entities. 

FATCA Categories

All foreign payees will be classified as either a foreign financial institution (FFI) or non-financial foreign entity (NFFE). FFIs include (but are not limited to):  

  • Depository institutions (banks)
  • Custodial institutions (mutual funds)
  • Investment entities (hedge funds or private equity funds)
  • Insurance companies that offer cash value products or annuities (typically life insurance companies)

NFFEs are foreign entities that are not FFIs. 

Once the foreign payee is determined to be either an FFI or NFFE, then the categories within each classification must be determined. A description of the most common types of entities in each category are provided below along with the FATCA withholding obligation associated with each category.

Action Steps

If making payments of U.S. source passive income to foreign entities, the following must be done:

  1. Determine who is being paid (foreign or U.S. person)
  2. Get documentation to support that conclusion (either a W-9 or W-8 form)

- If paying a foreign entity, get an updated W-8BEN-E that confirms the payee’s FATCA status. If the payee is a participating FFI, check the published monthly list of participating FFIs to confirm their status. 

- Determine (based on the FATCA status) if it is necessary to withhold the 30% FATCA obligation. If not, determine if other withholding rules would apply. It is important to note that payments exempt from FATCA withholding are still subject to the long-standing withholding rules under Internal Revenue Code Sections 1441 through 1446.

If you (or a member of your consolidated group) are considered an FFI or NFFE, and such foreign entity is receiving payments of U.S. source income subject to FATCA withholding, the following must be done to ensure that you are registered and in compliance with FATCA: 

  1. FFIs need to register on the FATCA website and sign the FFI agreement. If they are in a Model 1 country, they must do so by 12/31/14. If they are in a Model 2 country or a country with no IGA, they must do so immediately. 
  2. Passive NFFEs (defined below) need to determine which category of NFFE they will be.

    - A passive direct reporting NFFE (defined below) needs to register on the FATCA website and report their substantial direct and indirect U.S. owners on Form 8966 by March 31.
     

    - A passive indirect reporting NFFE (defined below) must list their substantial direct and indirect U.S. owners on the W-8BEN-E they provide to potential withholding agents. 
     
  3. There is no action required with respect to active NFFEs (defined below).

The FATCA registration website can be found at https://sa.www4.irs.gov/fatca-rup/.

The official FFI list can be found at http://www.irs.gov/Businesses/Corporations/FATCA-Foreign-Financial-Institution-List-Search-and-Download-Tool.

Common FATCA Entity Types

  • Foreign Financial Institution (FFI):

    - Exempt FFI: Exempt FFIs include most governmental entities, most non-profit organizations, certain small or local financial institutions, and certain retirement entities. No FATCA withholding is required.

    - Participating FFI: FFIs that have registered with the IRS using the online registration or through filing a Form 8957. They appear on the official FFI list (that is issued monthly) with a valid Global Intermediary Number (GIIN).  Participating FFIs have signed an FFI agreement to provide the IRS with information about U.S. account holders (name, identifying number, address, maximum balance, etc.). FFIs that are in a country that has signed a Model 2 Intergovernmental Agreement (IGA) are also included as a participating FFI. No FATCA withholding is required. 

    - Nonparticipating FFI: FFIs that do not register with the IRS and are subject to a 30% withholding tax on all payments of U.S. sourced income that is fixed or determinable, annual or periodic income (generally passive income such as interest, dividends, rents, royalties, etc.).  

    - Deemed Compliant FFI: Deemed compliant FFIs include certain local banks, qualified collective investment vehicles, restricted funds, retirement plans, FFIs with only low value accounts, and FFIs that are in a country that has signed a Model 1 Intergovernmental Agreement (IGA). No FATCA withholding is required.   
  • Non-Financial Foreign Entity (NFFE):

    - Excepted NFFE: Excepted NFFEs include publicly traded companies and their affiliates, certain entities organized in U.S. territories, and certain non-financial entities (holding companies, treasury centers, etc.). No FATCA withholding is required. 

    - Active NFFE: An Active NFFE is an NFFE where less than 50% of its gross income for the preceding calendar year is passive type income and less than 50% of its assets for the preceding calendar year are assets that generate passive type income. No FATCA withholding is required. 

    - Passive NFFE: A passive NFFE is an NFFE that isn’t excepted or active. It could fall into three different categories: 
  1. Direct Reporting NFFE: A direct reporting NFFE registers with the IRS and gets a GIIN number. It reports its direct or indirect substantial U.S. owners on Form 8966. No FATCA withholding is required.
  2. Passive indirect reporting NFFE: An NFFE that does not directly report its U.S. owners to the IRS, but does report its U.S. owners on the W-8BEN-E. No FATCA withholding is required.
  3. Passive non-reporting NFFE: A passive NFFE that does not report its direct or indirect substantial U.S. owners (directly or indirectly). These NFFEs are subject to a 30% withholding tax on all payments of U.S. source income that is fixed or determinable, annual or periodic income (generally passive income such as interest, dividends, rents, royalties, etc.). 

About the Author
Ryan Miller is a partner in Katz, Sapper & Miller’s Tax Services Group. Ryan provides consulting services on a variety of technical tax matters, with an emphasis on international tax. He also oversees tax compliance and handles tax controversies. 

 

About the Author
Katherine Malarsky is a director in Katz, Sapper & Miller's Tax Services Group. Katherine provides consulting services on technical tax matters. She has experience in cost allocation methodologies, export incentive calculations, and international earnings and profits. Connect with her on LinkedIn.

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State & Local Tax Update - 9/24/14

Posted 4:20 PM by

Trending Assessment for Indiana Real Property Taxes

Indiana counties are currently wrapping up their 2014 trending assessments. During trending years, assessors are required to review recent sales and verify that the assessments are accurate using mass appraisal techniques. This process can become difficult for commercial properties due to the lack of arms-length sale transactions. 

Property owners are encouraged to review their assessment notices (Form-11) as soon as they receive them to make sure the assessed value looks appropriate. The property owner has 45 days to file an appeal after the mailing of the first notice of assessment. When a property owner receives their tax bill, it is often too late to appeal the assessed value for that year. Many counties have already mailed their assessments, and the 45-day appeal period is well underway.

Contact your KSM advisor, or KSM property tax leader Chad Milleras soon as you receive your Form-11. We would be happy to review the assessed value of your commercial property to help you consider whether an appeal should be filed.


Indiana Supreme Court Reverses Tax Court Decision on Calculation of Net Operating Losses:

The Indiana Supreme Court ruled that a multinational manufacturer may not deduct foreign source dividends when calculating Indiana net operating losses, and the disallowance of the deduction did not violate the Foreign Commerce Clause of the U.S. Constitution. For more information, see Indiana Department of State Revenue v. Caterpillar, Inc., Ind. S. Ct. Dkt. No. 49S10-1402-TA-79. 08/25/2014.

Illinois Issues Final Sourcing Rules for Local Sales Tax:

In response to the recent Hartney decision, the Illinois Department of Revenue has issued final regulations regarding sourcing for local tax purposes. The final regulations indicate the local tax liability is based on the location where the retailer is "engaged in the business of selling tangible personal property," and are effective June 25, 2014. See 86 Ill. Admin. Code §§ 220.115, 270.115, 320.115, 370.115, 395.115, 630.120, 670.115, 690.115, 693.115 and 695.115 for additional information.

Illinois Appellate Court Finds Non-Titled Personal Property Use Tax Ordinance Invalid:

The Cook County Use Tax of Non-Titled Personal Property Tax Ordinance was found invalid for violating the Counties Code. Home rule counties are prohibited from imposing a use tax based on the selling or purchase price of tangible personal property per ILCS Chapter 55 § 5/5-1009. The court concluded that the use tax is actually a sales tax on the purchase of the property, and accordingly, the ordinance is an improper use tax on the selling or purchase price of personal property that is prohibited. For details see Reed Smith v. Ali et al., Ill. App. Ct. (1st Dist.), Dkt. No. 1-13-2646, 08/04/2014.

Louisiana Amnesty Program Details Released:

The Louisiana Department of Revenue has announced that its 2014 Amnesty Program will run from October 15, 2014, through November 14, 2014. The Tax Amnesty Fact Sheet provides details on eligible taxpayers, eligible taxes, and benefits of the program.

Massachusetts Amnesty Program Details Released:

The Massachusetts Department of Revenue has announced that its 2014 Amnesty Program will run from September 1, 2014, through October 31, 2014. The amnesty FAQs provide details on eligible taxpayers, eligible taxes, and benefits of the program.

Michigan to Exempt Business Property from Personal Property Tax:

Ballot Proposal 14-1 was approved by voters August 5, 2014. The proposal will allocate a portion of the state use tax to fund the elimination of the personal property tax on eligible industrial and commercial personal property. The ballot proposal reduces the state portion of the use tax and replaces it with a local community stabilization share of the tax to fund the exemption of eligible industrial and commercial personal property from the personal property tax. The ballot measure takes effect January 1, 2015.

New Jersey Tax Court Disallows Credit for New York Tax Paid:

A New Jersey resident S corporation shareholder was allowed a tax credit for taxes paid to New York on her S corporation income only to the extent that the New York tax was paid on income that would have been allocated to New York under New Jersey's allocation rules. For the tax year in question, 80% of the S corporation's income was allocated to and taxed by New York based on New York's single factor gross receipts formula while only 60.8% of the S corporation's income would have been allocated to New York under New Jersey's three- factor formula. The court ruled that the credit for taxes paid to another state does not apply to the extent that tax is paid to New York on income that would have been allocated to New Jersey under New Jersey's tax rules. See Criticare, Inc. and Marina Haber v. Director, Division of Taxation, N.J. Tax Ct., Dkt. No. 008253-2013, 07/08/2014  for details.

About the Author
Donna Niesen is a partner in Katz, Sapper & Miller’s State and Local Tax Group. Donna helps keep clients up-to-date on the multitude of tax rules and requirements in all 50 states. She guides them in the right direction as they address the complex issues that emerge on both the state and local levels. Connect with her on LinkedIn.

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