07.19.2013 Southeast State & Local Tax: Important Developments - July 2013
BY: STEPHANIE LIPINSKI GALLAND & KYLE H. WINGFIELD
The Williams Mullen Southeast State and Local Tax (SESALT) team is pleased to provide you with a comprehensive recap of recent legislation around the U.S.
RULINGS OF THE TAX COMMISSIONER
Updated Tax Guidelines
- Virginia Port Volume Increase Tax Credit Guidelines. P.D. 13-123.
- Virginia Sales and Use Tax Guidelines. P.D. 13-102.
- Virginia Insurance Premium License Tax Guidelines. P.D. 13-122.
- Motor Vehicle Rental Tax Guidelines. P.D. 13-109.
Corporate Income Tax
- Port Volume Increase Tax Credit. The Virginia Port Volume Increase Tax Credit is available to certain taxpayers that ship cargo through Virginia Ports. The credit is equal to $50 for each 20-foot equivalent unit (“TEU”) above the base year port cargo volume each year. Legislation enacted in 2013 expands the types of taxpayers that may claim the credit. Under prior law, the credit could only be claimed by manufacturers or distributors of goods. Under the new legislation, the credit may be claimed by taxpayers that are agricultural entities, manufacturing-related entities or mineral and gas entities. The Department of Taxation has released guidelines concerning the Virginia Port Volume Increase Tax Credit. P.D. 13-123.
Sales and Use Tax
Sales Tax Changes Not Imposed in Counties of Gloucester and Surry. Effective July 1, 2013, the Virginia sales and use taxes increased from 5% to 5.3%. An additional sales and use tax of 0.7% also became effective in the areas surrounding Hampton Roads and Northern Virginia. The additional 0.7% tax will not apply in the counties of Gloucester and Surry, as originally planned. New guidance published by the Department of Taxation reflects this change and provides information about the sales and use tax increases in other areas. P.D. 13-102.
- Incomplete Exemption Certificate Not Valid. Pursuant to Va. Code § 58.1-623(A), dealers have the burden of showing that a sale, distribution, lease, or storage of tangible personal is not subject to the sales and use tax unless the customer provides the dealer with a valid exemption certificate. Dealers may rely on an exemption certificate received in good faith from the buyer, even where information on the certificate later proves to be incorrect. However, dealers may not rely on a certificate that is incomplete (e.g., does not list the customer’s address or provide information stating the basis on which the exemption is claimed). P.D. 13-101.
Individual Income Tax
Request to Allocate Income Denied. The Department of Taxation denied a request by a State A limited partnership to allocate its Virginia-source income rather than using the statutory method for apportioning income. The Department ruled that partnerships with income subject to tax in Virginia and at least one other state must apportion their income under Va. Code §§ 58.1-408 through 58.1-421 unless clear and cogent evidence shows that the statutory method of apportionment is inequitable. P.D. 13-86.
Non-Resident Truck Driver Not Subject to Virginia Income Tax. The Department of Taxation ruled that a non-resident truck driver was not subject to Virginia income tax on amounts earned as an employee of a Virginia trucking company and on payments he received as the sole proprietor of a trucking business. The Department reasoned that federal law Title 49 U.S.C. § 14503(a)(1) prohibits a state from imposing a net income tax on compensation paid by motor carriers to non-resident employees and independent contractors who provide transportation services in two or more states. P.D. 13-90.
Refund Denied because Amended Return Not Filed within Statute of Limitations Period. The Department of Taxation denied a refund claimed by a taxpayer on his 2008 individual income tax return because the return was not filed until May 22, 2012. The Department ruled that taxpayers who do not timely file their returns have three years from the original due date (not the extended due date) to request a refund. As the taxpayers’ original return was not filed by May 1, 2012, the statute of limitations period for claiming a refund for the 2008 tax year had expired. P.D. 13-94.
- Non-Qualified Pension Distribution Subject to Virginia Income Tax. The Department ruled that a retirement distribution that became due and payable to a taxpayer while he was a resident of State A (but was not actually received until after he became a Virginia resident) was subject to Virginia income tax. Although the distribution was constructively received while the taxpayer was a resident of State A, the Department held that federal law Title 4 U.S.C. § 114 only allows taxpayers to be taxed on retirement income in their state of residency when such income is actually received. P.D. 13-95.
DISTRICT OF COLUMBIA
Sales and Use Tax Exemption on Electricity to Certain Restaurants. Effective August 1, 2013, Washington D.C. provides a sales and use tax exemption for sales of electricity to separately metered or sub-metered restaurants. The exemption is similar to the existing exemption for sales of gas to restaurants. For purposes of the exemption, a “restaurant” includes a pizzeria, delicatessen, ice cream parlor, cafeteria, take-out counter and caterer, and banquet and food processing areas in hotels. D.C. Rev. Notice No. 2013-02.
- Property Tax Credit Increases. Effective April 27, 2013, the Schedule H Property Tax Relief Act of 2012 increased the maximum credit for property taxes paid to $1,000 from $750. For residents who rent their principal residence, the amount of rent paid that constitutes property taxes increases from 15% to 20% of rent. The act provides adjustments for tax years beginning after December 31, 2005. L. 2013, Act 19-649 (Law 19-283).
North Carolina Tax Reform. The North Carolina General Assembly is expected to approve a tax reform proposal later this week. Highlights include (i) reducing and simplifying the 3-tiered state personal income tax from the current maximum rate of 7.75% and minimum rate of 6% to 5.8% in 2014 and 5.75% in 2015; (ii) increasing the standard deduction for all taxpayers; (iii) increasing the state child tax credit for families making less than $40,000 per year; (iv) offering a $20,000 combined maximum deduction for mortgage interest and property taxes; (v) making charitable contributions fully deductible; (vi) protecting all Social Security income from state taxes; (vii) reducing the corporate income tax from 6.9% to 6% in 2014 and then to 5% in 2015; (viii) capping the gas tax; (ix) eliminating North Carolina’s estate tax; and (x) preserving the sales tax refund for nonprofits. Also, if the state meets revenue targets (i.e., tax revenue grows due to a growing economy), the corporate income tax will drop to 4% in 2016 and 3% in 2017.
- Dates for Annual Sales Tax Holiday Announced. The North Carolina’s sales tax holiday will begin on Friday August 2, 2013 at 12:01 a.m. and end on Sunday August 4, 2013 at 11:59 p.m. During the holiday, no sales tax will apply to certain items of tangible personal property: clothing, footwear, and school supplies of $100 or less per item; school instructional materials of $300 or less per item; sports and recreational equipment of $50 or less per item; computers of $3,500 or less per item; and computer supplies of $250 or less per item. Participation is mandatory; retailers cannot “opt out.” Sales Tax Holiday Set for Aug. 2 – 4, N.C. Dept. of Rev., 7/10/2013.
- Motor Fuel Tax Rate Changes. The Maryland Comptroller’s Office issued a release summarizing recent legislative changes to the motor fuel tax rate, the sales and use tax equivalent rate and the inventory (floor) tax. Maryland Comptroller’s Office, Motor Fuel Tax Pub., No 3-2013 (6/7/2013).
- Dates for Annual Sales Tax Holiday Announced. South Carolina’s annual three-day sales tax holiday will begin on Friday, August 2, 2013, at 12:01 a.m. and end on Sunday, August 4, 2013 at 11:59 p.m. During the holiday, no sales or use tax will apply to certain “back-to-school” items (e.g., clothing, school supplies, computers, printers, computer software, blankets, bed spreads and linens, bath towels, shower curtains and similar items. Additional information about the sales tax holiday can be found at S.C. Info. Ltr. No 13-13; S.C. Rev. Rul. 10-7 and S.C. Rev. Rul. 10-8.
AROUND THE NATION
California – Enterprise Zone Credit Program. On July 11, 2013, California Governor Jerry Brown signed Assembly Bill 93 and Senate Bill 90. The legislation makes sweeping changes to California’s Enterprise Zone Credit Program, including a new credit for hiring over the next 7 years, a new partial sales and use tax exemption for purchases over the next 8 fiscal years and a new “California Competes” incentives credit program related to certain investments and employment expansion in California over the next 11 calendar years.
Michigan. The Michigan Supreme Court agreed on July 3, 2013 to review a Court of Appeals decision holding that a taxpayer could not use the allocation and apportionment methods under the Multistate Tax Compact (“MTC”) to compute its Michigan Business Tax (“MBT”). See InternationalBusiness Machines Corp. v. Dept. of Treasury, Mich. Ct. App., Dkt. No. 306618, 11/20/2012 (unpublished); leave to appeal granted, Mich. S. Ct., Dkt. No. 146440 (7/3/2013). Recently, in Anheuser-Busch, Inc. v. Michigan Dep’t of Treasury, Mich. Ct. of Claims, Case No. 11-85-MT (June 6, 2013), the Michigan Court of Claims held that a taxpayer could make the MTC election for purposes of computing the business income tax component of the MTB but not for the modified gross receipts tax. Perhaps to resolve any conflict between IBM and Anheuser-Busch, the Michigan Supreme Court granted the taxpayer’s petition to review the IBM case.
New Jersey – Guidance on Taxation of Cloud Computing. The New Jersey Division of Taxation recently released a technical bulletin on how the state’s sales and use tax laws apply to cloud computing services. The bulletin addresses cloud computing services in three categories: Software as a Service (“SaaS”), Platform as a Service (“PaaS”) and Infrastructure as a Service (“IaaS”). N.J. Tech. Bulletin TB -72.
New York – Companies Not Required to File Combined Report. An administrative law judge (“ALJ”) ruled that two taxpayers, KLC and Kindercare, a corporation acquired by KLC in 2005, were not entitled to file a combined report for the 2007 tax year. In 2007, New York tax law was amended to require combined reporting if corporations are engaged in a unitary business where capital stock and substantial intercorporate transaction requirements are met. In its decision, the ALJ held that substantial intercorporate transactions did not exist between the taxpayers, as there was no written documentation that employees were transferred from Kindercare to KLC. The ALJ also rejected the taxpayers’ claim that KLC paid all of Kindercare’s expenses, as the accounts showed that KLC was merely paying expenses on Kindercare’s behalf. In the Matter of the Petition of Knowledge Learning Corp. and Kindercare Learning Centers, Inc., NYS Division of Tax Appeals, ALJ, Nos. 823962; 823963, (6/27/2013).
New York – Metropolitan Transit Authority Tax Upheld. The New York Supreme Court, Appellate Division, reversing the trial court, held that the Metropolitan Commuter Transportation Mobility Tax Law (“Payroll Tax”) was properly enacted and comports with the requirements of the New York Constitution. The Payroll Tax is imposed on employers engaged in business in the Metropolitan Commuter Transportation District and on the net earnings of self-employed persons attributed to that area, which includes New York (Manhattan), Kings (Brooklyn), Queens, Bronx, Richmond (Staten Island) and surrounding counties. Mangano v. Silver, N.Y. S.Ct., App. Div., 2nd Dept., Dkt. No. 2012-09463, (6/26/2013).
Washington – Business and Occupation Tax Preferences Expanded. On June 30, 2013, Washington Governor Jay Inslee signed legislation expanding Business and Occupation (B&O) tax and sales and use tax preferences. The bill creates or extends exemptions for taxpayers in numerous businesses and industries, including payroll services, agriculture, restaurants, cooperative finance, financial information, alternative energy, blood and tissue collection, amusement and recreation and aviation. (L. 2013, S5882 (c. 13), effective 10/1/2013 unless otherwise stated).
- Wisconsin – Updated Guidance on Tax Changes. The Wisconsin Department of Revenue issued guidance providing an index to changes in the state's tax laws in the 2013–15 budget bill. The guidance also provides a brief description of major provisions affecting individual income tax, corporation franchise and income tax, sales and use tax, estate tax and interest and penalties, among other items. The index also lists the effective date for the various tax law changes listed. (Wisconsin Dept. Rev. Tax Bulletin No. 180).