11.26.2013 Southeast State & Local Tax: Important Developments - November 2013
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.
- Virginia Income Tax Treatment of Same-Sex Marriages. The Department of Taxation issued P.D. 13-209, providing that same-sex married couples who file federal income tax returns jointly, or as married taxpayers filing separately, will be required to file their Virginia income tax returns as single individuals. In Rev. Rul. 2013-17, the IRS announced that same-sex married couples will be treated as married for federal tax purposes if they are legally married in a state that recognizes same-sex marriages, regardless of whether such couples live in a state that recognizes same sex marriages. See also Windsor v. U.S., 133 S.Ct. 2675 (2013). In P.D. 13-209, the Department notes that, although Virginia generally conforms to federal income tax law, Art. I, § 15-A of the Virginia Constitution and Va. Code § 20-45.2 specifically prohibit same-sex marriages in Virginia. P.D. 13-209 (i) provides an overview of some of the required adjustments that same-sex married couples must make when filing their Virginia income tax returns as single taxpayers and (ii) briefly covers adjustments that must be made by businesses that claim deductions for certain expenses incurred for same-sex partners of employees. P.D. 13-209.
- Supreme Court of VA Holds that Tolls are “Fees” Not “Taxes.” The Supreme Court of Virginia held that tolls imposed on the Midtown Tunnel, Downtown Tunnel and MLK Extension in Hampton Roads are valid “user fees” and not “taxes.” The plaintiff claimed that the tolls are a tax because the purpose of the tolls is to raise revenue, payments are not voluntary and there is no reasonable alternative method to travel. In Westbrook, Inc. v. Town of Falls Church, 185 Va. 577 (1946), the Court ruled that a tax is "an enforced contribution imposed by the government for governmental purposes or public needs." In Hampton Roads Sanitation District Commission v. Smith, 193 Va. 371 (1952), the Court held that “tolls are user fees when they are nothing more than an authorized charge for the use of a special facility.” Pursuant to these decisions and other authorities cited in the decision, the Court held that the tolls were user fees because (i) toll road users pay the tolls for a particular benefit not shared by the general public; (ii) drivers are not compelled by government to pay the tolls or accept the benefits of the project facilities; and (iii) the tolls are collected to fund the project, not to raise general revenues. Elizabeth River Crossings v. Meeks, Va. S. Ct., Dkt. No. 130954, (Oct. 31, 2013).
CORPORATE INCOME TAX
Corporate Nexus Created Activities of Virginia Employee. The Department of Taxation held that an out-of-state corporate taxpayer must file a Virginia corporate income tax return because of the activities of one employee who performed legal services for the taxpayer from her home in Virginia. Federal law P.L. 86-272 prohibits a state from imposing a net income tax where the only contacts with a state are a narrowly defined set of activities constituting solicitation of orders for sales of tangible personal property. The Department noted that the provision of legal services generally exceeds the protections provided under P.L. 86-272 unless such services are de minimis. Based on the facts provided, the Department ruled that the taxpayer must (i) file a Virginia corporate income tax return, (ii) withhold Virginia income taxes from the wages of its Virginia employee and (iii) register with the Department’s Registration Unit. The Department did not opine as to whether the taxpayer must pay unemployment taxes in Virginia, as such taxes are administered by the Virginia Employment Commission. P.D. 13-203.
- Commissioner Rejects Royalty and Interest Add-Back. The Department of Taxation denied a full refund for all payments made to an affiliated entity for royalty and interest on the basis that Va. Code § 58.1-402(B)(8) and § 58.1-402(B)(9)(a)(4)(i) only provide for a portion of the payments to be excluded from add-back. The Department held that the exception to the add-back provisions was limited to the portion of the payments that corresponded to the related member’s share subject to income tax in another jurisdiction. The Department noted that such amounts could be evidenced by “the apportionment percentages shown on the affiliate’s tax returns filed with other states." P.D. 13-193.
SALES AND USE TAX
Taxpayer Not Entitled to Agricultural Exemption. The Department of Taxation ruled that agricultural equipment purchased by the taxpayer did not qualify for the agricultural exemption to the sales and use tax under Va. Code § 58.1-609.2(1). The taxpayer removed the bio-solid materials from municipal waste treatment plants and contracted with farmers to spread the materials on farmlands. The exemption provided under Va. Code § 58.1-609.2(1) applies to tangible personal property necessary for use in agricultural production for market when sold to a farmer. According to the Department, the rationale for the exemption is that many items purchased by farmers are used to produce products that are subsequently taxed. The exemption prevents double taxation by taxing only the sale of the product to the consumer. As the taxpayer was not a farmer and was not engaged in agricultural production for market, the Department ruled that the exemption did not apply to the taxpayer’s purchases. This ruling supports the Department’s position that exceptions are narrowly construed against the taxpayer. P.D. 13-190.
Safe Rental Not the True Object of Armored Car Service. The Department of Taxation ruled that a taxpayer’s provision of safes to customers as part of its armored car services was not subject to sales and use tax. Virginia generally taxes rentals of tangible personal property, but it does not tax the provision of armored car services. When a transaction includes taxable property and a non-taxable service, Virginia looks at the true object of the transaction. If the true object is the property, the transaction is taxable. If the true object is the service, it is not taxable. The Department held that the exempt armored car service was the true object of the transaction and that the provision of the safes was an extension of the exempt service. Consequently, the provision of safes to customers was not taxable. As the deemed user and consumer of the safes, however, the taxpayer is subject to sales and use tax when it purchases the safes. P.D. 13-196.
Retailer vs. Contractor. The Department of Taxation ruled that a taxpayer was a “contractor” because it did not satisfy the three-prong test to qualify as a “retailer” under Va. Admin. Code § 10-210-410(G). The taxpayer sold and installed shelving and cabinets, which it purchased from third parties and stored at its facility until they were installed. Virginia taxes tangible personal property used or consumed by contractors in construction as sales not for resale. However, Va. Admin. Code § 10-210-410(G) provides an exception for retailers who sell and install items such as cabinets and kitchen equipment. To qualify as a retailer, the taxpayer must (i) have a retail or wholesale place of business, (ii) maintain an inventory of items or materials to become a component part of the qualifying items, and (iii) perform the installation incident to the sale. The Department ruled that items stored in a warehouse until they are ready to be consumed are not an “inventory.” Trim pieces and parts to modify shelves also are not an inventory because they constitute only a few of the pieces necessary to fabricate the finished product. Accordingly, the Department ruled that the taxpayer was a contractor liable for sales tax on purchases in connection with its sales contracts. The Department also ruled that the taxpayer cannot charge customers the sales tax on the invoiced cost of the shelving and cabinets. P.D. 13-204.
- Resort Package Memberships. The Department of Taxation ruled that a resort proposing to sell corporate memberships for a three-year period must charge sales tax on the entire package charge for the memberships. The membership packages entitled four individual members to lodging, meals, use of golf carts and tickets to golf tournaments at the resort. The Department ruled that pursuant to Va. Code Ann.§ 58.1-303(4) and P.D. 12-67, packages offered by hotels, motels, etc. which include a single charge for accommodations, services or tangible personal property (e.g., including lodging, meals, attractions, and greens fees) are subject to tax on the entire package. Therefore, the Department ruled that the corporate memberships are subject to sales tax on the full amount of the charge when billed to the customer. P.D. 13-205.
- Statute of Limitations Extended on Overpayment Withheld by the Department. The Department of Taxation ruled that the statute of limitations for filing an amended return was extended by an amount withheld by the Department to offset the taxpayer’s tax liability. The taxpayer, a tax-exempt 501(c)(5) organization, reported unrelated business taxable income (“UBTI”) on its 2008 Virginia income tax return. The taxpayer did not pay the tax, and the Department issued an assessment. The Department offset the liability with a refund due to the taxpayer on an overpayment it made to a Virginia state university. The Department applied the refund toward the balance due on the assessment in 2013. The taxpayer later discovered that it had mistakenly reported the UBTI on its Virginia return without applying a net operating loss (“NOL”). Had the NOL been properly reported, the taxpayer would have had no Virginia taxable for 2008. To correct the error, the taxpayer filed an amended return for 2008. Generally, the statute of limitations for filing an amended return is three (3) years. As an exception, Va. Code § 58.1-1823(A)(iv) provides that a taxpayer may file an amended return within two (2) years after the payment of an assessment if (i) the amended return raises issues solely relating to such assessment and (ii) the claim for refund does not exceed the amount of such payment. Amounts obtained by collection actions and applied towards a Taxpayer's assessment are payments for purposes of this exception. As the assessment was paid in part by the amount withheld and all requirements under Va. Code § 58.1-1823(A)(iv) were satisfied, the Department ruled that the taxpayer may file an amended 2008 Virginia return and claim a refund with interest. P.D. 13-186.
INDIVIDUAL INCOME TAX
No VA Credit for NY Metropolitan Commuter Transportation Mobility Tax. The Department of Taxation ruled that the New York Metropolitan Commuter Transportation Mobility Tax (the “NY MCTMT”) is not substantially similar to the Virginia income tax and, therefore, does not qualify for the credit provided to Virginia residents on income taxes paid to another state under Va. Code § 58.1-332(A). The Department ruled that the NY MCTMT is unlike the Virginia individual income tax because it is not based on income and more closely resembles payroll and self-employment taxes. Also, the NY MCTMT only applies to individuals engaged in business within a particular locality, and all proceeds from the NY MCTMT are allocated to a specific entity and purpose. The Virginia individual income tax does not contain any similar restrictions. P.D. 13-185.
- Standard Deduction for Non-Resident Aliens. The Department of Taxation ruled that a non-resident alien (“NRA”) who was a resident of India may claim the Virginia standard deduction. Virginia is a conformity state, and § 63(c)(6)(B) of the Internal Revenue Code generally prohibits NRAs from claiming the standard deduction for federal income tax purposes. As an exception, Article 21 of the U.S. – India income tax treaty provides that students and business apprentices who are not exempt from tax are entitled to the same deductions as US residents. Accordingly, the Department ruled that, if the NRA is entitled to claim a federal deduction, he also may claim the Virginia standard deduction. P.D. 13-187.
- Income Tax Withholding. The North Carolina Department of Revenue released the income tax withholding tables and instructions for employers for 2014. The publication reflects the reduction in the income tax rate to 5.8%, effective for wages paid on or after January 1, 2014. The publication also advises taxpayers that a new Form NC-4 EZ has been created and that revisions have been made to Form NC-4 (Employee's Withholding Allowance Certificate) and Form NC-4P (Withholding Certificate for Pension or Annuity Payments). The publication advises that, for calendar year 2014 withholding, the Department no longer has Form NC-3M (Annual Withholding Reconciliation-Monthly). Monthly, quarterly, and semi-weekly filers must file their 2014 annual reconciliation using Form NC-3 (Annual Withholding Reconciliation). Form NC-30—Income Tax Withholding Tables and Instructions for Employers, N.C. Dept. of Rev., revised 11/01/2013).
DISTRICT OF COLUMBIA
Taxpayer Subject to DC Income Taxes Following Move to U.S. Virgin Islands. The District of Columbia Court of Appeals held that a taxpayer who moved from DC to the U.S. Virgin Islands (the “USVI”) was subject to income tax in DC because (i) he remained a domiciliary of DC and (ii) did not satisfy the requirements to be exempt from filing U.S. federal and DC income tax returns. The taxpayer moved to the USVI in 2002 and stayed there through 2005. He filed U.S. federal income tax returns for 2003 and 2004, but he did not file any local returns or pay any local taxes in the USVI. Under D.C. Code Ann. § 47-1805.02(1), every resident of DC who is required to file a federal return must also file a DC return. Under § 932(c)(4) of the Internal Revenue Code (the “Code”), bona fide residents of the USVI are exempt from filing a federal return if they satisfy the requirements of Code § 932. One of the requirements under Code § 932 is that the taxpayer must file a return and pay taxes in the USVI. The taxpayer did not file a return or pay taxes in the USVI. The taxpayer also did not show that he had abandoned his DC domicile. Consequently, he was subject to DC filing requirements and income taxes for the relevant years. Bartholomew v. District of Columbia Office of Tax and Rev., D.C., No. 12-AA-169 (Oct. 24, 2013)
- DC Announces Alternative Method to Receive Income Tax Refund. The District of Columbia Office of Tax and Revenue announced that, beginning in 2014, taxpayers will have the option of choosing a new method to claim their income tax refunds. A prepaid card will be available to taxpayers as an alternative to paper checks and direct deposits. Taxpayers can use the prepaid cards to securely pay bills and to make purchases online. Taxpayers will also be able to make in-person cash withdrawals at most banks. DC OTR, News Release (Nov. 5, 2013).
- EITC Eligibility and Married Same-Sex Couples. The Maryland Comptroller’s Office issued a tax alert reminding employers to provide, on or before December 31, 2013, electronic or written notice to an employee who may be eligible for the federal and Maryland earned income tax credit. The alert also reminds legally married same-sex couples that they must file as “married filing jointly” or “married filing separately” for 2013. Employees intending to adjust their withholding to reflect married status should complete a new Maryland Form MW507 and federal Form W-4. Md. Tax Alert 13-10.
- Accommodations Tax. The Department of Revenue issued a new fact sheet regarding the statewide sales and use tax on accommodations, including registration and filing requirements. The charge for providing accommodations is subject to the statewide sales tax rate of 7% (5% state and 2% local accommodations) plus any applicable local sales and use tax rate administered and collected by the Department on behalf of the counties. The tax fact sheet also describes which transactions are not subject to the tax. S.C. Dept. of Rev. Accommodations Tax Fact Sheet (2013).