05.08.2013 SESALT Newsletter - May 2013
BY: STEPHANIE LIPINSKI GALLAND & KYLE H. WINGFIELD
2013 GENERAL ASSEMBLY
Guidelines for 2013 Sales and Use Tax Changes. Effective July 1, 2013, the Virginia Transportation Bill, H.B. 2313 (Va. 2013), increases the statewide sales and use taxes from 5% to 5.3% and provides for an additional sales and use tax of 0.7% in Hampton Roads and Northern Virginia. On May 1, 2013, the Department of Taxation published extensive guidelines regarding the sourcing, collection and payment of these taxes. Va. P.D. 13-57.
- Tax Credits. S.B. 1227 (Va. 2013) expands the Neighborhood Assistance Act Tax Credit and Education Improvement Scholarships Tax Credits programs by (i) allowing tax credits for donations of marketable securities under the Education Improvement Scholarships Tax Credits program; and (ii) establishing $125,000 as the maximum annual amount of donations by an individual for tax credits issued under the Neighborhood Assistance Act Tax Credit program. Va. Dept. of Tax, Impact Statement.
RULINGS OF THE TAX COMMISSIONER
Corporate Income Tax
Collection of Tax. The Department of Taxation ruled that the president of a corporation (“APC”) was liable for the corporate income tax due on the sale of substantially all of APC’s assets. Although the president maintained that the sales proceeds were not sufficient to pay the tax, the Department held that the president had a fiduciary duty under Virginia law to determine how the sale would affect APC’s tax liability. Because the president negotiated the sale, knew it would result in taxable gain and failed to make a provision for any tax liability, the Department ruled that the president acted “willfully” and, therefore, was fully liable for APC’s taxes under Va. Code § 58.1-1813(A). Va. P.D. 13-49.
- Change of Corporate Filing Status. The Department of Taxation denied the taxpayer’s request to file a consolidated Virginia return after the merger between Corporation X and Corporation Y. Under the “merger of equals” standard, when a merger occurs between two Virginia affiliated groups, the new affiliated group may elect to file Virginia income tax returns using the method previously used by the acquiring or target group. As Corporation B was not a member of a Virginia affiliated group, the Department ruled that the merger of equals standard did not apply and that Corporation A and Corporation B must file on a combined basis. Va. P.D. 13-48.
Sales and Use Tax
Untaxed Sales and Purchases. The Department of Taxation ruled that the taxpayer, a hotel and restaurant operator, was subject to sales tax on purchases by a customer that it mistakenly believed was a tax-exempt entity of the United States government. As the taxpayer's records reflected that the sales at issue were a consistent part of the taxpayer's business, not isolated in nature, the Department ruled that such purchases also could be used as the sample size for assessing the sales tax. Va. P.D. 13-32.
- Purchases Made Pursuant to Government Contract. The Department of Taxation ruled that the taxpayer, a contractor, was subject to the sales and use tax under Virginia law as the user and consumer of the product. The taxpayer had purchased raw materials that it shipped to Virginia and fabricated into products installed in a building for a tax-exempt entity. The Department also ruled that the “temporary storage exemption” did not apply because the taxpayer did not purchase the raw materials free from tax in another state. Va. P.D. 13-34.
Business Professional and Occupational Tax
- Reclassification on BPOL Returns. The Department of Taxation ruled that, in order to receive a refund for misclassifying itself on its BPOL returns for prior years, the taxpayer must document its proper classification for those years. The Department also ruled that (i) although the NAICS definitions of industries may be useful in evaluating business classification, they are not controlling for BPOL classification; and (ii) the Virginia retail sales and use tax regulations are not reliable resources for evaluating local tax issues. Va. P.D. 13-25; see also Va. P.D. 13-31.
Individual Income Tax
- Credit Denied to Part-Year Resident. The Department of Taxation ruled that Virginia law prohibits part-year residents from claiming any credit against their tax liability for income tax paid to another state. The Department also observed that, because the taxpayer did not report her State A wages on her Virginia return, no Virginia tax had been imposed on the State A wages. Consequently, the Department denied the taxpayer’s claim for credit as to her State A wages. Va. P.D. 13-28.
DISTRICT OF COLUMBIA
- Update on Possible Revisions to DC Tax Code. The Tax Revision Commission will continue its discussion about the possible revision of the DC Tax Code this month. On May 6, 2013, the Commission will receive comments and presentations on business franchise taxes and individual income taxes. During May and June, the Commission also will hear from various individuals on property, deed and recordation, and sale and use taxes. The Commission has received an extension on its deadline to provide a report to the City Council until the fall of 2013.
- Corporate Income Tax. The North Carolina business court ruled that an add-back deduction that had not been fully taken by a C corporation prior to its conversion to an S corporation could not be used by the subsequent S corporation shareholders. The court held that, in order to be able to deduct such amounts from taxable income, North Carolina law expressly requires the taxpayer to add back to taxable income previously accelerated depreciation. As the S corporation shareholders previously made no such additions to their taxable income for the add-back deductions now claimed, the add-back accelerated depreciation belonged to the C corporation. Bodford v. N.C. Dept. of Rev., Nos. 11 CVS 607, 464, 608, & 466, 2013 NCBC 19, 20, 21, & 22 (N.C. Business Ct. Apr.10, 2013).
Tax Credits – Research and Development. Effective June 1, 2013, Maryland increases the aggregate amount of R&D tax credits that the Department of Business and Economic Development can approve in each calendar year from $6 million to $8 million. The credit is refundable if the business claiming the credit meets certain criteria. The change applies to all R&D tax credits certified after Dec. 15, 2012. H.B. 386 (Md. 2013).
- Tax Credits – Neighborhood and Community Assistance Program. Effective Oct. 1, 2013, Maryland increases the maximum sum of contributions for specified projects under the Neighborhood and Community Assistance Program that are eligible for a specified tax credit from $2 million to $3.5 million. H.B. 108 (Md. 2013).
Exempt Government and Related Business Sales. The Department of Revenue issued guidance regarding the taxability of sales to: (i) employees of the federal government, including instrumentalities of the federal government, such as the American Red Cross or federal credit unions; (ii) foreign diplomats; and (iii) other similar employees, such as employees of nonprofit organizations or state governments and colleges. S.C. Info. Ltr. 13-9 (April 16, 2013).
- New Property Owner has Standing for Assessment Appeal. The Court of Appeals of South Carolina held that a purchaser of real property had standing to appeal the 2010 property tax assessment, even though he was not the owner when such tax was levied, because he was “a person whose property or interest in property is subject to a property tax imposed.” Taylor v. Aiken County Assessor, No. 5103 (S.C. Ct. App. 2013).
AROUND THE NATION
Illinois – Refund for Tax Paid During Amnesty Program. The Illinois Court of Appeals ruled that a Taxpayer was entitled to a refund of tax paid during amnesty for the 1997 tax year because the tax return requesting the refund was timely filed within the statute of limitations. Con-Way Transp. Serv., Inc. v. Hamer, No. 1-11-3410 (Ill. App. Ct. 2013).
Illinois – Non-Resident Partner has Nexus. The Illinois Department of Revenue ruled that the entire portion of a non-resident partner’s distributive share was attributable to Illinois and that all of his guaranteed payment should have been included on his 2010 Illinois income tax return. IL. Dept. of Rev., IT 12-00028-GIL (2012).
Kentucky – Local Option Sales Tax Requires Constitutional Amendment. The Attorney General of Kentucky opined that the local option sales tax could not be enacted without a constitutional amendment. The Attorney General also opined that the legislature could not delegate such power to the localities without a constitutional amendment. Ky. Op. Att’y Gen. 13-001 (2013).
Kentucky – Revisions to Credit Amounts and Certain Deductions. Kentucky enacted legislation, H.B. 440 (Ky. 2013), to reduce personal income tax credits, modify a corporate deduction for management fees charged to affiliates, and establish compliance measures to suspend or revoke business licenses of delinquent taxpayers. It is estimated that the changes will generate $95.7 million in taxes for the 2014 fiscal year and $99 million for the following year.
Oregon – Parent Company does not have Nexus. The United States Bankruptcy Court held that inclusion of a parent company on an Oregon consolidated return did not mean that the parent company was doing business in Oregon. In re Washington Mutual, Inc., No. 09-122229 (B.R. D.E. 2012).
Oregon – Dividends within Unitary Tax Group Excluded from Tax Base. The Oregon Tax Court held that income derived from the taxpayer’s wholly-owned insurance company must be excluded from the Oregon group’s tax base. Stancorp Fin. Grp, Inc. v. Dep’t of Rev., No. 5039 (Or. Tax. Ct. 2013).
- Tennessee - Franchise and Excise Tax. The Tennessee Department of Revenue ruled that a corporation that licenses patents which ultimately lead to Tennessee sales is not subject to the franchise and excise tax. Tenn. Rev. Rul. 12-27.
- Internet Sales Tax Bill Passes Senate. On May 6, 2013, the United States Senate voted 69 to 27 in favor of the Marketplace Fairness Act, S. 743, 113th Cong. (2013), which allows states to force online retailers with more than $1 million in out-of-state sales to collect sales tax for state and local governments. Under current law, online retailers can be required by a state to collect sales taxes only if they have a physical presence in the state. The next vote will occur in the House of Representatives, H.R. 684, 113th Cong. (2013), where the act is expected to receive more opposition from Republican leaders wary of new tax measures.
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