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State & Local Tax Update - 8/7/15

Posted 12:45 PM by

KSM Location Advisors 

Whether your company is just starting up, looking for the best location to build a new headquarters, or you have been in the business for many years and are looking to expand, KSM Location Advisors can provide a high-level and/or in-depth location analysis, which includes information important to your company’s location decisions. For more information about how your business may benefit from this service, please contact Katie Culp at kculp@ksmlocationadvisors.com

 
 

Arizona Provides Sales and Use (TPT) Guidance on Changes to Prime Contracting Classification

TPN 15-1 has been issued to provide guidance on questions arising from recent legislative changes to the prime contracting classification, including new exemptions for the gross income derived from the maintenance, repair, replacement or alteration (MRRA) activities affecting real estate when the activities are performed directly for the property owner or authorized party. Note that modifications remain taxable.

Kansas Issues Guidance on Effective Date of Change Taxing Guaranteed Payments

The Kansas Department of Revenue has issued Public Notice 15-11, indicating the exclusion of guaranteed payments as an acceptable deduction to Kansas AGI is effective July 1, 2015, and not retroactively. 

Maryland Issues Guidance on 2015 Amnesty Program

The Maryland comptroller has issued information on the upcoming 2015 Tax Amnesty Program. The program runs from Sept. 1 through Oct. 30, 2015, and waives all civil penalties and one-half of the interest for delinquent taxpayers who apply and are approved. The tax amnesty application, tax amnesty calculator, and Tax Amnesty BillPay will be available by Aug. 28, 2015. Tax amnesty applications will be accepted beginning Sept. 1, 2015. See Maryland 2015 Amnesty for additional information on the program. 

New Jersey Rules on Residency of Telecommuters

In Gundecha v. Board of Review and DB Services New Jersey, the New Jersey Superior Court, Appellate Division, has ruled a telecommuter working in North Carolina for her employer in New Jersey was considered to be working in North Carolina and was not eligible for unemployment compensation benefits in New Jersey. Although the case dealt with unemployment compensation, some parallels from this case may be applied in the income tax context. 

New York Rules Buyer Responsible for Seller Sales Tax Liability

The taxpayer was liable for sales tax related to the bulk purchase of the business assets of a New York-based kitchen and bath company. The transfer at issue was clearly a bulk sale as a transfer to the taxpayer of the entire business assets of the seller outside the ordinary course of business.

At the time of the bulk sale transfer, the seller owed sales tax. The taxpayer, as the purchaser, was obligated to notify the Division of the transaction and withhold from the seller the transfer of any consideration on the purchase until payment of that liability was made.

Failure to comply with the notification requirements resulted in the taxpayer becoming personally liable for the payment of any New York state sales and use taxes determined to be due from the seller. For more details, see In the Matter of the Petition of GB&K/DCS LLC.

Tennessee Issues Notice on Taxability of Remotely Accessed Software

Important Notice 15-14 has been issued to reflect recent legislative changes with regard to the taxability of certain software products. Effective July 1, 2015, the taxable use of computer software in Tennessee includes the access and use of software that remains in possession of the seller and is remotely accessed by a customer for use in Tennessee. The notice outlines the reason for the change and related issues, including multiple points of use.

Tennessee Amends Definition of Nexus for Franchise, Excise and Business Taxes

Effective for tax years beginning on or after Jan. 1, 2016, taxpayers are subject to the franchise and excise tax if they are doing business in Tennessee and have substantial nexus with Tennessee. Substantial nexus is created if:

  1. The taxpayer is organized or commercially domiciled in Tennessee;
  2. The taxpayer owns or uses capital in Tennessee;
  3. The taxpayer has systematic and continuous business activity in Tennessee that has produced gross receipts attributable to customers in Tennessee (often referred to as economic nexus);
  4. The taxpayer licenses intangible property for use by another party in Tennessee and derives income from the use of that intangible property; or
  5. The taxpayer has bright-line presence* in Tennessee.

*The taxpayer has bright-line presence in Tennessee if any of the following applies:

  1. The taxpayer's receipts in Tennessee exceed either $500,000 or 25% of the taxpayer's total receipts everywhere;
  2. The average value of the taxpayer's real and tangible property owned or rented and used in Tennessee during the tax period exceeds $50,000 or 25% of the taxpayer's total real and tangible property; or
  3. The taxpayer paid compensation in Tennessee that exceeded more than $50,000 or 25% of the total compensation paid by that taxpayer. For more information, see HB0644

Tennessee Amends Apportionment Sourcing and Factor Weighting

Effective for tax years beginning on or after July 1, 2016, receipts from sales, other than sales of tangible personal property, are in Tennessee if the taxpayer's market for the sale is in Tennessee. In the case of the sale, rental, lease or license of real or tangible property, the market for the sale is in Tennessee to the extent that the property is located in Tennessee.

In the case of sale of a service, the sale will be sourced to Tennessee to the extent that the service is delivered to a location in Tennessee. In the case of intangible property that is rented, leased or licensed, the sale will be sourced to Tennessee to the extent that the intangible property is used in Tennessee.

Additionally, the weight of the sales factor increases so that it makes up 60% of the apportionment factor rather than 50% of the apportionment factor. For more information, see HB0644.

Washington Rules Captive Paymaster Subject to Business and Occupation (B&O) Tax

By failing to establish it had no liability to pay the employer obligations except as an agent of its affiliates, failing to establish it was a Form 2678 Agent for its clients, and failing to notify employees of the client’s status as employer liable for all employer obligations, a taxpayer was subject to B&O tax on all gross income received from related parties for the provision of payroll and benefits services, accounting services and administrative services. For more information, see  WA Tax Determination 14-0175.

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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Deferral of New Revenue Recognition Standard: Contracts with Customers

Posted 3:28 PM by

The Financial Accounting Standards Board (FASB), on July 9, 2015, approved a one-year deferral of the effective date of Accounting Standards Update (ASU) 2014-09 Revenue from Contracts with Customers. The new revenue recognition standard will now become effective Jan. 1, 2019, for nonpublic, calendar-year entities.

Although deferred until the 2019 calendar year, entities that present comparative financial statements are required to present both years under the new standard. Therefore, entities need the ability to track their revenues under the new rules starting in 2017.

This decision was driven largely by the input of stakeholders through the FASB’s Transition Resource Group (TRG), which is charged with informing the FASB about potential implementation issues.

The FASB will next draft an Accounting Standards Update for formal written vote to incorporate the deferral into the codification.

For more information on this ASU or the TRG, visit fasb.org.

About the Author
Matt Bishop is a director in Katz, Sapper & Miller’s Audit and Assurance Services Department. Matt audits and reviews financial statements, and he advises clients on accounting, reporting and compliance matters. Connect with him on LinkedIn.


 

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Trucking Toward State Tax Compliance: Is a VDA the Right Option?

Posted 2:59 PM by
Many companies struggle to determine if they have sufficient activity in a state, or nexus, to force them to file state tax returns. This can be especially difficult for transportation companies. One of the issues is whether driving more than a de minimis amount of miles through a state creates a tax filing obligation. 
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Senate Finance Committee Extends “Tax Extenders”

Posted 7:38 PM by
Yesterday, Senate Finance Committee Chairman Orrin Hatch (R-Utah) and Ranking Member Ron Wyden (D-Ore.) announced progress on a bipartisan bill to extend multiple pro-business and pro-individual tax provisions that expired at the end of 2014. 
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2015 Tax Amnesty Dates Announced

Posted 8:11 PM by

Many legislative changes were made by the Indiana General Assembly during the 2015 legislative session, one of which included a mandate for the Indiana Department of Revenue (IDOR) to implement a tax amnesty program before 2017.

Yesterday, Gov. Mike Pence announced that IDOR will conduct “Tax Amnesty 2015” from Sept. 15, 2015, through Nov. 16, 2015. 

Similar to the amnesty offered by Indiana in 2005, the program provides an opportunity for individuals and businesses to disclose and pay unreported taxes that were due and payable for a tax period ending before Jan. 1, 2013, in exchange for abatement of penalties, interest, and collection fees or costs that would have otherwise been imposed.

Taxpayers who are eligible to participate in the amnesty program and choose not to participate will be subject to an additional penalty, effectively doubling the penalty that would ordinarily be imposed on a delinquent liability. Taxpayers who participated in the 2005 amnesty program are not eligible to participate.

For more information, visit in.gov/dor/amnesty/.

About the Author
Donna Niesen is a partner in Katz, Sapper & Miller’s State and Local Tax Practice. Donna provides a wide variety of tax consulting services in the areas of multistate sales and income taxes, business incentives, controversy services, and other state taxes. Connect with her on LinkedIn.



About the Author
Tim Cook is the partner-in-charge of Katz, Sapper & Miller's State and Local Tax Practice. Tim supervises and coordinates all state and local tax consulting services, including business incentives and site selection, multistate taxes, and unclaimed property. Connect with him on LinkedIn.

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The ACA and PCORI Fee Updates

Posted 5:25 PM by
The Affordable Care Act (ACA) created the Patient-Centered Outcomes Research Institute (PCORI) fee. This fee is to be used to fund research on medical treatment effectiveness and is to be paid by both fully-insured and self-funded group health plans.
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Four Important Legislative Updates for Manufacturers

Posted 5:49 PM by

KSM recently released its Indiana Legislative Update, summarizing important tax and economic development legislative changes that occurred in this year's Indiana General Assembly.

The legislature addressed everything from long-simmering issues to new topics, sprinkling in clarifications of old laws and (if history is our guide) new laws that will require clarification in the future. However, there were a handful of new laws that specifically impact manufacturers.

While the highly anticipated expansion of the Indiana sales tax exemption for manufacturers – via the elimination of the double-direct test – did not come to pass, there were plenty of other tax law changes affecting manufacturers that did. Below are four that we find especially significant:

  1. Elimination of the throwback rule: For multistate companies shipping their product out-of-state, the throwback rule has historically inflated the calculation of Indiana sales for purposes of income tax apportionment. Sales to states in which the company did not file an income tax return were “thrown back” and treated the same as if they were shipped to Indiana. This has long been argued as negatively impacting companies with manufacturing and/or distribution facilities in Indiana. Effective Jan. 1, 2016, this rule is no more.
     
  2. R&D exemption narrowed: The R&D exemption provides that certain equipment purchased for research and development activities can be purchased exempt from sales tax. The definition of what does and does not qualify was tweaked, including a new requirement that the underlying activity be deemed “essential and integral” to experimental or laboratory research and development. This added requirement narrows the scope of the exemption, potentially impacting manufacturers with Indiana R&D activities.
     
  3. Manufacturing exemption expanded: Although Indiana’s “double-direct” test for determining the sales tax exemption for manufacturing equipment was not eliminated, the legislature made a modest change to expand its scope. The double-direct test requires a subjective analysis of when production begins and ends, with equipment used outside of this integrated process not eligible for the exemption. The manufacturing exemption was expanded to include material handling equipment used for the purpose of transporting materials into production activities from an onsite location. Manufacturers will now be able to acquire some equipment involved in pre-production activities exempt from tax, such as a forklift used to move raw goods.
     
  4. Exemption for labels: A new exemption was created for labels to be affixed to a product being sold if the label is required in order to comply with state or federal law. This new law’s silence on its potential impact on other types of packaging may result in a narrowing of the current packaging exemption. If this new law results in a but-for test, it would undoubtedly lead to a more restrictive exemption and increased packaging costs for manufacturers.

A full legislative summary can be found on our website. If you see a reference to a particular piece of legislation that is of interest, feel free to contact us. We are happy to discuss it with you. 

About the Author
Tim Cook is the partner-in-charge of Katz, Sapper & Miller's State and Local Tax Practice. Tim supervises and coordinates all state and local tax consulting services, including business incentives and site selection, multistate taxes, and unclaimed property. Connect with him on LinkedIn.

 

About the Author
Donna Niesen is a partner in Katz, Sapper & Miller’s State and Local Tax Practice. Donna provides a wide variety of tax consulting services in the areas of multistate sales and income taxes, business incentives, controversy services, and other state taxes. Connect with her on LinkedIn.

 

About the Author
Tim Conrad is a state and local tax consultant in Katz, Sapper & Miller’s State and Local Tax Practice. Tim provides consulting services on technical tax matters, including multistate income, property and sales taxes, as well as economic development services. Connect with him on LinkedIn.

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Deadline to Complete the 2014 FBAR Quickly Approaching

Posted 7:46 PM by

Deadline to Complete the Report of Foreign Bank and Financial Accounts (FBAR) for Calendar Year 2014 is June 30, 2015.

Any U.S. person that has a financial interest in or signature authority over a foreign financial account, including a bank account, brokerage account, mutual fund, trust, or other type of foreign financial account may be required to report those accounts and balances to the Department of Treasury’s Financial Crimes Enforcement Network (FinCen)

 

Who Needs to File

Only U.S. persons that have a financial interest in or signature authority over foreign financial account(s) that have more than $10,000 maximum value at any point during the year must file. This is an aggregate determination. If the aggregate value of all foreign financial accounts is over $10,000 (even though there is no individual account over that threshold amount), an FBAR must be filed listing all foreign accounts. 

  • A U.S. person means any person that is a resident of the United States or subject to the jurisdiction of the United States. The term “person” is used in the broad legal sense and includes any individual, corporation, partnership, estate, trust, branch or other organization.
  • A financial interest means that the U.S. person is the owner of record or has legal title of the account, regardless of whether the account is maintained for their benefit. This can also include a person acting as an agent, nominee, attorney, or person acting on behalf of someone else with respect to the account.
  • Signature authority is the authority of any individual (alone or with another individual) to control the disposition of the assets held in the foreign financial account by direct communication with the bank or financial institution that maintains the account. 

Additionally, if there is a U.S. person that owns more than 50% of an entity that has a foreign account, the U.S. person and the entity must each file and report the foreign account information. 

 

What to File

The account(s) and their associated information must be reported on Form 114, “Report of Foreign Bank and Financial Accounts” (formerly known as a TD.F 90-22.1). 

 

Where to File

All FBAR forms must be filed electronically with FinCen through the BSA E-Filing System. That system can be accessed at http://bsaefiling.fincen.treas.gov/, or your KSM advisor can help facilitate this filing. 

 

When to File

All FBAR filings related to calendar year 2014 are due by June 30, 2015. There are no extensions available. 

 

Penalties

The penalties for failure to file an FBAR are severe. There can be civil penalties of $10,000 for each non-willful violation. Additionally, if it is found that the violation is willful, the penalty can be the greater of $100,000 or 50% of the amount in the foreign account for each violation (each year that an FBAR wasn’t filed is viewed as a separate violation). Criminal penalties are also a possibility, including up to five years of imprisonment with increased monetary penalties. 

Please contact your KSM advisor for additional assistance or for help completing this important U.S. government filing.

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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Indiana Supreme Court Denies Review of SAC Case

Posted 7:21 PM by

On Dec. 24, 2014, the Indiana Tax Court issued its long-awaited decision in SAC Finance vs. Indiana Department of State Revenue, a case that centered on the calculation of the allowable bad debt deduction afforded to the financing arm in a buy here-pay here structure. In SAC, the finance company purchased paper from a related retailer on a non-recourse basis at a discount. The central issue in the case was whether the finance company could calculate its allowable bad debt deduction using the Market Discount Rules.

The Indiana Tax Court held that the finance company was entitled to use the Market Discount Rules and the Indiana Department of Revenue (IDR) was incorrect in disallowing refunds calculated on this basis – reversing course on the IDR’s long-standing position that the sales tax, bad debt deduction calculation excluded market discount income. 

The IDR petitioned the Indiana Supreme Court for review of this case, and the petition was denied June 4, 2015.

We expect the IDR to issue guidance for taxpayers, both on past and future refund claims, in response to the denial and its indirect affirmation of the sales tax treatment as outlined by the Indiana Tax Court. An update will be provided outlining IDR’s response.

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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Indiana Supreme Court Denies Review of Lowes Case

Posted 2:38 PM by

The Indiana Tax Court issued a decision Dec. 19, 2014, in Lowes Home Centers, LLC v. Indiana Department of State Revenue that may radically change the sales tax landscape for Indiana real property contractors.
 
The Indiana Department of Revenue (IDR) has had a long-standing policy of applying a different tax treatment, depending on the underlying real property construction contract. The historic treatment has been as follows:

  • Contractors operating under a lump-sum contract — treated as the end user of materials, and thus taxed on the cost of materials they purchase
  • Contractors operating under a time and materials (T&M) contract — treated as sellers of materials, and thus have a responsibility to collect sales tax on materials transferred to customers

The Indiana Tax Court held that this distinction between T&M and lump-sum contractors does not exist in the Indiana Code, and the IDR has inappropriately created an artificial distinction via regulations it has adopted. As a result, it was determined that Lowes should owe use tax on its costs of materials incorporated into realty via a T&M contract (i.e., be treated as a lump-sum contractor would historically have been treated).

The IDR petitioned the Indiana Supreme Court for review of this case, and the petition was denied June 4, 2015.

The effect of this decision could mean that there is now one Indiana standard for all real property construction contractors, regardless of the type of contract entered into with its customer. Having a uniform standard – in which the contractor would owe use tax on its purchases of all materials incorporated into realty in Indiana – could significantly decrease the recordkeeping/compliance burden of contractors utilizing multiple types of contracts.

We expect the IDR to issue guidance for taxpayers, both on past and future transactions, in response to the denial and its indirect affirmation of the sales tax treatment as outlined by the Indiana Tax Court. An update will be provided outlining IDR’s response.

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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