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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 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.

 

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