03.18.2016 Southeast State & Local Tax: Important Developments - March 2016
The Williams Mullen Southeast State and Local Tax (SESALT) team is pleased to provide you with a comprehensive recap of important tax developments around the Southeast.
CORPORATE INCOME TAX
Conformity with Internal Revenue Code. Virginia Governor Terry McAuliffe signed emergency legislation on February 5, 2016 that advances the state's general conformity to the Internal Revenue Code from December 31, 2014 to December 31, 2015. Certain exceptions may apply. VA Tax Bulletin No. 16-1, 02/05/2016.
- Consolidated Return. The Department of Taxation ruled that, under appropriate circumstances, it is authorized by the Code of Virginia to determine that income of a corporate affiliate is Virginia taxable income even if the affiliate does not have nexus with Virginia. Pursuant to the ruling, the existence of a positive apportionment factor for the parent clearly establishes income from Virginia sources. Parent corporations that do not have a positive apportionment factor are not subject to Virginia income tax if separate returns are filed, but affiliates of such parent corporations have the burden of proving that they have no Virginia source income. Va. P.D. 15-229.
Guidelines for Pass-Through Entity Withholding. The Department of Taxation issued updated guidelines for pass‐through entity withholding effective for taxable years beginning on or after January 1, 2015. When finalized, the new guidelines will supersede the existing guidelines located in VA P.D. 07-150. Among other items, the new guidelines provide information on (i) pass‐through entity withholding tax requirements for non-resident owners; (ii) filing requirements and exemptions based on the nonresident owners' status; (iii) corporate allocation and apportionment requirements; and (iv) penalties and interest. Va. P.D. 15-240.
- Non-Resident Withholding Exception. The Department of Taxation ruled that withholding is not required for a nonresident owner when the pass-through entity receives rental income from four (4) or fewer dwelling units within the Commonwealth; provided the pass-through entity discloses the name and federal taxpayer identification number of all such owners on its pass-through entity return. Va. P.D. 15-238.
Historical Rehabilitation Tax Credit. The Department of Historic Resources amended regulations relating to the historic rehabilitation tax credit, effective February 10, 2016. Among the changes, the amendments require applicants to provide (i) certain information on the “Evaluation of Significance” on the Historic Preservation Certification Application; (ii) an independent audit reporting and review procedures for expenses of $500,000 or greater; (iii) an agreed-upon procedures engagement report prepared by an independent accountant for expenses of less than $500,000. The applicable beginning date for the credit has been changed from January 1, 1997 to January 1, 2003. 17 VAC §§ 10‐30‐10 through 10‐30‐160.
- Statute of Limitations of Out of State Tax Credits. The Department of Taxation ruled that, under Va. Code § 58.1-1823(A)(v), a taxpayer has one (1) year from the final determination of a change made by any other state to file an amended return to request a refund. Thus, in cases where the general statute of limitation under Va. Code § 58.1-1823 (allows a taxpayer to file an amended return within three (3) years after the last day prescribed by law) has expired, the return shall still be timely filed if it is within one (1) year after the final determination of another state. Va. P.D. 15-226.
SALES AND USE TAX
Nexus Clarification for Fulfillment Centers. The Department of Taxation ruled that a taxpayer did not have to register in Virginia for collection and remittance of Virginia sales and use tax for completing customer orders through a fulfillment center in Virginia. In determining whether registration is required, the Department stated that it looks at whether the taxpayer has sufficient activity within Virginia to require registration as a dealer, collection, and remittance of sales and use tax. Va. Code Ann. § 58.1-612(C) details what activities within Virginia require a dealer to register for collection of sales and use tax. Va. P.D. 15-194.
Rental accommodations. The Department of Taxation ruled that Virginia sales and use tax applies to the rental of any accommodation for 90 days or less. The taxpayer contended that sales and use tax did not apply to vacation home rentals because renters were not transients within the meaning of the statute. The Department ruled that a “transient” includes individuals staying briefly at a location and does not refer to whether they have another residence. The Department also observed that Code of Virginia § 58.1-603 does not limit the tax to rental properties that are not houses, or that are furnished only by businesses, or those specifically enumerated in the statute. Finally, the Department ruled that there is currently no exemption for seasonal renters. Va. P.D. 15-196.
- Communication sales tax. The Department of Taxation ruled that the broadband recovery fee, the service activation fee, and the early termination fee charged in connection with the sale of Internet access service were subject to Virginia’s communication sales tax. Although the federal Internet Tax Freedom Act bars the application of state tax to Internet access service, it does not prohibit the connectivity charges from being subject to the communication sales tax. Va. P.D. 15-217, 15-218.
Machinery and Tools tax. The Department of Taxation ruled that machinery and tools (“M&T”) used directly in the manufacturing processes were subject to the M&T tax. The ruling clarifies that “directly used” does not imply that each piece of machinery or tool must be directly connected to the complete transformation of a material into something substantially different in character. The ruling also clarifies that “manufacturing process” is not limited to the final process of making the products to be sold, but leaves open the possibility of multi-stage manufacturing processes and the possibility that one manufactured article may be consumed in the process of making another. VA P.D. 15-212.
- Recordation Taxes. The Department of Taxation held that the county clerk should take the actual purchase price into consideration when determining fair market value of the property. The taxpayer argued an actual purchase price is a better indication of fair market value and that the higher assessed value by the clerk is not representative of the actual value. The Department noted that the value of real estate is a factual determination, and that a clerk should determine the best value for recordation purposes by relying on someone with knowledge of the property and local market conditions. The Department also noted that Va. Code Ann. § 58.1-3201 requires assessments of real estate for property tax to be at fair market value and that the actual consideration paid for the conveyance should be taken into account. Va. P.D. 15-236.
Market-Based Sourcing. The North Carolina Department of Revenue has issued guidelines for computing the sales factor based on market-based sourcing. The guidelines include information on the following: (i) the criteria for having to file an informational report with the Department, (ii) a summary of the market-based sourcing principles, (iii) tables to provide a reference tool for taxpayers, and (iv) examples to assist taxpayers in understanding the provisions of market-based sourcing. Introduction and Summary—Guidelines for Market-Based Sourcing, N.C. Dept. of Rev., 01/29/2016; Guidelines for Computing the Sales Factor Based on Market-Based Sourcing, N.C. Dept. of Rev., 01/26/2016.
- Repeal of Installation Charges Exemption in North Carolina. The North Carolina Department of Revenue issued an important notice regarding installation charges. Effective March 1, 2016, installation charges by a retailer to a purchaser in connection with the retail sale of tangible personal property, certain digital property and taxable services are subject to the applicable rate of sales and use tax for the item, notwithstanding that the installation charges may be stated separately by the retailer. Effectively, installation charges are now taxable service in North Carolina. Important Notice: Repeal of Installation Charges Exemption, N.C. Dept. of Rev., 01/11/2016.
DISTRICT OF COLUMBIA
- Franchise Tax Rates. The newly enacted emergency legislation, “Fiscal Year 2016 Budget Support Emergency Amendment Act 2016," amends the business franchise tax rates of corporations and unincorporated businesses from 9.4% to 9.2% when there is available funding. D.C. Code Ann. § 47-181. L. 2016, Act 21-292, effective January 27, 2016, for a 90-day period that expires April 26, 2016, and applicable December, 31 2015.
- Guidance on Wynne case updated. The Maryland Comptroller's Office issued updated FAQs for guidance regarding refund requests as a result of the United States Supreme Court’s decision in Comptroller of the Treasury of Maryland v. Wynne, U.S. S. Ct., Dkt. No. 13-485, 05/18/2015. For taxpayers who received a refund that did not include taxes paid to another state's local jurisdiction, the comptroller will send a letter advising how to make an additional claim, which is due within 90 days and must include the specific dollar amount and supporting documentation. Also, for taxpayers who received a refund and would like to make a claim for interest in addition to the 3% annual rate on interest-eligible refunds, the comptroller will send a letter advising how to make an additional claim, which must include the specific dollar amount requested as an additional refund. Comptroller v. Wynne FAQs, Maryland Comptroller's Office, 12/07/2015.
- Ohio -- VA Company to CAT Based on Novel Theories to Assert Nexus. The Ohio Supreme Court is considering a dispute involving a Virginia electronic distributor as to whether the state is allowed to use novel theories, such as cookies or tracking software, to assert nexus and subject a taxpayer to Ohio commercial activity tax (CAT). In addition, the case presented questions, such as, whether the physical presence test applies since CAT is not a sales and use tax; whether CAT should subject to a less strict economic presence standard as with income tax; whether the physical presence test established by Quill is outdated law. If decided on the merits, the case could prove to be a watershed as other states put forth novel theories of tax nexus. Crutchfield Corp. v. Testa, case number 2015-0386, Supreme Court of Ohio.