State and local tax advisor: January 2020
Sales and use tax additional updated guidance regarding marketplace facilitators released
Hawaii has released additional updated guidance on the expanded imposition of general excise tax (GET) on sales made through marketplace facilitators under Act 2, Session Laws of Hawaii 2019 (Act 2). Act 2 became effective on Jan. 1, 2020.
Marketplace facilitators affected
Act 2 defines “marketplace facilitator” as any person who sells or assists in the sale of tangible personal property, intangible personal property, or services on behalf of another by providing a forum for the listing or advertisement of the item and by collecting payment from the purchaser, either directly or indirectly. “Marketplace facilitator” means a website, application, or platform of any type and includes, but is not limited to, the following business models:
- Educational service websites or applications, such as those that host third-party educational content and connect customers to that content.
- Food delivery service marketplaces, such as those that offer delivery of food to customers.
- Transportation network companies, such as those that connect customers to providers of motor vehicle transportation.
- In-person service and task-based service platforms, such as those that connect customers to service providers able to perform tasks or services for those customers.
- Remote service marketplaces, such as those that connect customers with service providers that provide computer programming services or other services that can be provided remotely.
- Remote intangible property or data access marketplaces, such as those that provide customers access to third-party data stores, other intangible property, or computing power.
- Brick-and-mortar marketplaces of any type, including those listed above.
- Travel agents and tour packagers that have engaged in activities relating to the furnishing of tourist-related services, as defined under Section 237-18(f), HRS, that go beyond merely arranging for the furnishing of the service.
The Tax Information Release has been revised once again and “Peer-to-peer car sharing/rental marketplaces, such as those that connect customers with individual car lessors” has been added to the list of marketplace facilitators.
Tax Information Release No. 2019-03 (Revised), Hawaii Department of Taxation, Dec. 19, 2019
Emergency market-based sourcing rules adopted
Indiana has adopted emergency regulations explaining and implementing market-based sourcing of receipts from the provision of services and other intangibles. Indiana adopted market-based sourcing effective Jan. 1, 2019.
Receipts from the sale, rental, lease, or license of real property are in Indiana if and to the extent that the real property is in Indiana.
Tangible personal property
In the case of a rental, lease, or license of tangible personal property:
- The receipts from the sale are in Indiana, if and to the extent that the property is in Indiana.
- Receipts from mobile property that is located both in and outside of Indiana during the period of the lease or other contract, are in Indiana if they are from the contract period multiplied by the ratio of the time the property is used in this state to the time the property is used everywhere.
- Property in transit between locations of the customer is considered to be at the destination of the property.
- Receipts from the rental, lease, or license of an automobile assigned to a traveling employee is included in the numerator for Indiana to the extent the employee’s compensation would be assigned to Indiana or to the state the automobile is licensed in if the employees compensation cannot be ascertained.
If a service is performed on the body of an individual customer in Indiana or in the physical presence of the customer in Indiana the benefit of the service is received in the state where the service is performed. For in-person services provided remotely, the service is in Indiana if the person receiving the service is in Indiana.
Services delivered by physical means
Services delivered to a customer by physical means are attributed to Indiana to the extent the customer receives the benefit in Indiana. The regulation contain specific rules.
Electronic delivery of services
Services delivered to an individual customer by electronic transmission are sourced to Indiana if the customer receives the service in Indiana. In the absence of actual knowledge of the place of receipt, taxpayers can source the receipts based on the customer’s billing address.
Services delivered to a business customer by electronic transmission are sourced to Indiana if and to the extent the service is used in Indiana. The regulations provide a set of rules to determine the state a service is used in.
In the case of services delivered electronically through or on behalf of an individual or business customer, the receipts are sourced to Indiana to the extent that the end-users or other intended recipients of the service are in Indiana.
In the case of professional services provided to an individual customer, the receipts will be sourced to the customer’s state of primary residence, subject to conditions. For professional services provided to a business customer, the receipts will be sourced:
- For real or tangible personal property, including, but not limited to, architectural and engineering services, the location of the property.
- For other professional services, to the state from which the contract is principally managed.
- If the state in subdivision cannot be determined, then the state of the customer’s place of order.
- If the place of order cannot be determined, then the state of the customer’s billing address.
- However, if a taxpayer receives 5% or more of its receipts from a customer, the taxpayer is required to identify the state in which the contract of sale is principally managed by the customer.
- In the event of professional services provided to a related party, the portion of the taxpayer's services in Indiana will be in proportion to the related-party’s receipts from Indiana to the related-party’s receipts from all jurisdictions.
Receipts from the license or lease of intangible property are attributable to Indiana to the extent the intangible is used in Indiana. The regulations provide detailed conditions for:
- Licensing that conveys all substantial rights in the intangible property.
- Licensing as part of the sale or lease of tangible personal property.
- The marketing of intangibles.
- Licensing of rights to use intangible goods other than in connection with the sale, lease, license, or other marketing of goods, services, or other items.
- Both marketing an intangible and producing an intangible.
- Licensing of intangible property resembling the sale of an electronically delivered good or service.
For a sale or exchange of intangible property, the following conditions apply:
- Where the property is a contract right, government license, or similar intangible property that authorizes the holder to conduct a business activity in a specific geographic area, the receipts are assigned if and to the extent the property is used in Indiana.
- For a sale where the receipts depend on the productivity, use, or disposition of the intangible property, the sale shall be sourced like the license or lease of intangible property.
- For receipts from the sale of intangible property resembling the sale of goods and services, the receipt is sourced in the same manner as the sale of the underlying good or service.
- For receipts from the sale or disposition of intangible property, the receipts will be excluded from both the numerator and denominator for apportionment purposes.
There are special provisions for receipts from:
- Airline transportation
- Railroad transportation
- Trucking or transportation service of tangible personal property
- Construction contracts
- Newspaper and magazine publishers
- Lottery or gambling
- The sale, exchange, or assignment of tax credits, or from the refundable portion of a tax credit
The emergency regulations are set to expire in 2020.
LSA #19-688(E), Indiana Department of Revenue, Jan. 1, 2020
Business interest expense conformity guidance issued
Iowa conforms with IRC Sec. 163(j) business interest expense deduction limitations in 2019. However, because Iowa didn’t conform in 2018, some taxpayer may still need to make certain adjustments to their federal business interest expense deduction to calculate the correct Iowa deduction amount for a given year.
The two most common adjustments are:
- 2018 carryforward amounts (all tax types)
- Corporate consolidated groups.
2018 carryforward amounts (all tax types)
Taxpayers who were eligible for the deduction in 2018, but for whom the deduction was limited for federal purposes, would have been allowed a larger Iowa deduction that year. While IRC Sec. 163(j) does limit the current business interest expense deduction, it also allows taxpayers to carry forward the disallowed amounts and deduct them in future years. This means that in 2019 and future tax years, taxpayers may be allowed a federal carryforward deduction.
After 2018, taxpayers whose business interest expense deduction was limited for federal, but not for Iowa, purposes in 2018 are required to add back any federal carryforward amounts from 2018 in the year those amounts are actually deducted for federal purposes on the taxpayer’s Iowa return for that tax year.
The adjustments and other carryforward amounts resulting from 2018 nonconformity are calculated and reported using the IA 101 Nonconformity Adjustments form, Part I. Taxpayers may not be allowed to deduct the entire federal 2018 carryforward amount in a single year, thus taxpayers may also need to add back the Iowa amount over several years. Part II of the IA 101 provides taxpayers with a way to track the:
- Original 2018 carryforward adjustment
- Amount already added back in prior years
- Amount left to add back in future years before the taxpayer’s 2018 nonconformity carryforward adjustments are complete
Corporate consolidated groups
When a corporation is included on a federal consolidated return the separate Iowa return filer or Iowa consolidated group will likely need to recalculate the business interest expense limitation deduction for Iowa purposes. The two situations when this is likely are:
- Files its own separate Iowa return.
- Is included on a consolidated Iowa return that does not include all of the same members as the federal consolidated return, because not all members of the federal group are subject to Iowa corporate income taxes (Iowa consolidated group).
The Iowa deduction amount is calculated in the same manner the deduction would be calculated for federal purposes, but using only the items of income and interest expense of the separate Iowa entity or Iowa consolidated group.
Business Interest Expense Conformity for Tax Year 2019 and Later, Iowa Department of Revenue, January 2020
Partnership interest expense nonconformity adjustment explained
Iowa has updated its business interest expense income tax guidance for partnerships and partners. The guidance now describes the adjustments and reporting procedures in 2019 for business that had a federal disallowed IRC Sec. 163(j) deduction in 2018, that was allowed as a deduction in Iowa. Iowa didn’t conform to IRC Sec. 163(j) in 2018.
The guidance addresses tax year:
- 2018 nonconformity adjustment for partners or S corporation shareholders who receive Iowa K-1s
- 2018 nonconformity adjustment for partners and shareholders who receive federal K-1s, but not Iowa K-1s
- 2019 and later reporting requirements and nonconformity adjustments for partnerships and partners
Partners or S corporation shareholders who receive Iowa K-1s
No 2018 Iowa nonconformity adjustment by owners of Iowa partnerships or S corporations for interest expense deducted by and passed through from an Iowa partnership or S corporation should be necessary.
After 2018, a partner will have to make adjustments to their own Iowa interest expense deduction and limitation calculation (if any) to account for amounts the partnership deducted for Iowa purposes but not for federal purposes in 2018. The partnership will be required to report certain information about these 2018 nonconformity adjustments to partners on the 2019 IA 1065 Schedule K-1.
Partners and shareholders who receive federal K-1s, but not Iowa K-1s
Partnerships and S corporations with no Iowa activities likely will not file an Iowa return or issue Iowa K-1’s that account for the larger Iowa deduction in 2018. Generally, owners of pass-through entities will be limited to claiming the deduction actually passed through to them by the entity, without the ability to make any Iowa adjustments. This is because:
- The owner’s basis in the entity will be adjusted by the amount of the deduction actually passed through.
- The entity isn’t required to provide the information to owners that would be necessary to make any Iowa adjustments.
This may result in a lower 2018 deduction for interest from these entities than the owner would have received had the entity filed a 2018 Iowa return. The owners will be eligible to receive the full-deduction amounts in future years. The treatment applies to shareholders of S corporations, which do not file Iowa returns or issue Iowa K-1s in 2018.
However, because partnerships and their partners report this deduction differently from S corporations and their shareholders at the federal level, the Iowa treatment for deductions received from a partnership that doesn’t file an Iowa return is also different. Partners know the exact amount of the 2018 disallowed business interest deduction and their basis in the partnership will be adjusted by that amount in 2018. So, partners who receive interest expense deductions from partnerships that do not file Iowa returns, but who do file Iowa returns, can still claim the larger Iowa deduction on business interest expenses actually passed through from the partnership, due to Iowa’s nonconformity for 2018. In order to claim the larger deduction, Iowa partners receiving a federal K-1, but not an Iowa K-1 should include as a business interest expense adjustment on their Iowa return a deduction equal to the amount shown on line 13, Code K of the federal K-1.
2019 and later reporting requirements and adjustments
Iowa taxpayers aren’t allowed to deduct business interest expense amounts that represent federal carryforward amounts from tax year 2018 and that were already allowed as an Iowa deduction in tax year 2018. Thus, partners will be required to add back federal carryforward amounts from tax year 2018 that were allowed as an Iowa deduction in tax year 2018 to the partner or to the Iowa partnership that had a 2018 filing requirement.
Thus, Iowa partnerships that had a 2018 Iowa filing requirement are required to report to each partner in tax year 2019 that partner’s share of the 2018 business interest expense that was disallowed for federal purposes, but which the partnership was allowed to deduct on the partnership’s 2018 Iowa Nonconformity Adjustments Worksheet, line 3.
For tax years after 2018, partners will use the sum of any amounts reported to them by an Iowa partnership in 2019 and any other business interest expense nonconformity adjustment made on the partner’s own 2018 Iowa tax return (except such adjustments that were made by partners that are themselves a partnership) to compute their 2018 Iowa carryforward adjustment that is required as an add back in tax year 2019 or later.
Reform Guidance - Partnership Interest Expense Nonconformity Adjustment, Iowa Department of Revenue, Dec. 31, 2019
Regulation governing pass-through entity election adopted
The Louisiana Department of Revenue has adopted a new corporate income tax regulation that provides procedures for pass-through entities to elect to be taxed as C corporations.
In order to make the election to be taxed as if filing as a C corporation at the federal level for state tax purposes, pass-through entities must fulfill the following requirements:
- The election must be approved by shareholders, members, or partners holding more than one-half of the ownership interest on the day of election.
- The entity must provide the department either: (1) a signed resolution verifying that more than one-half of the ownership interest in the entity approved the election, or (2) other written proof that more than one-half the ownership interest in the entity approved the election.
- The entity must make the election on Form R-6980, Tax Election for Pass-Through Entities, and submit the form to the department by email, with all specified documentation attached.
Any entity that files a composite partnership return is prohibited from making the election. Elections are timely if made:
- At any time during the preceding taxable year of the year in which the election is first effective.
- At any time during the taxable year in which the election is first effective or on or before the 15th day of the fourth month after the close of the taxable year in which the election is first effective.
The department will begin accepting elections on Feb. 1, 2020, for taxable years beginning on or after Jan. 1, 2019.
Filing tax returns after election
Each entity making the election must file Louisiana Form CIFT-620, Corporation Income Tax and Franchise Tax Return, for the applicable taxable year for which the election was made and all taxable years thereafter unless the election is terminated. Further, each entity making the election and filing Louisiana Form CIFT-620 will be required to file the return electronically. Failure to comply with the electronic filing requirement will result in the assessment of a penalty.
The following documents must be attached to Form CIFT-620 when filed:
- A pro forma Federal Form 1120 completed as if the entity had filed as a C corporation for federal income tax purposes, including all necessary federal schedules to compute the amount of federal tax that would have been due.
- Schedule K-1s as actually issued to the owners of the entity for the taxable year as well as Form R-6981, Statement of Owner’s Share of Entity Level Tax Items, reflecting any income that remains taxable to the entity’s owners in Louisiana after the election such as dividends and interest.
- Form R-6982, Schedule of Tax Paid if Paid by Owner, calculating how much tax would have been due if the entity had passed the income through to its owners and the tax had been paid at the owner level.
Credits and net operating losses
Louisiana tax credits and net operating losses recognized in taxable years prior to the election that have previously been passed through to the owners are tax items of the owners, and aren’t available for utilization at the entity level in taxable years to which the election applies. Conversely, Louisiana tax credits and net operating losses for any taxable year to which the election applies are tax items of the entity and any such credits or losses may not pass through to the owners of the entity regardless of whether or not the election is terminated in a future taxable year.
Termination of election
Entities who make the election may apply to the department to terminate the election. Any such termination request requires the written approval of more than one-half the of the ownership interest based upon capital account balances on the date the request is submitted. The secretary may terminate the election if the entity shows a material change in circumstances, including a significant change in federal law. A tax increase resulting from the decision to make the election may not be considered a material change in circumstances.
An entity must request to terminate the election by submitting a private letter request to the Policy Services Division of the Department of Revenue, and providing either: (1) resolution signed by secretary of the corporation or equivalent officer or manager verifying that more than one-half the ownership interest in the entity approved the request for termination, or (2) other written proof that more than one-half the ownership interest in the entity approved the request for termination.
The regulation can be viewed in the Jan. 20, 2020, edition of the Louisiana Register.
LAC 61.I.1001, Louisiana Department of Revenue, Jan. 20, 2020
Taxpayer’s in-state activities not protected by solicitation immunity
For Maryland corporate income tax purposes, the Tax Court (court) properly denied an out-of-state pet food retailer’s (taxpayer’s) request for a refund because its employees’ business activities in Maryland exceeded the scope of statutory solicitation immunity granted to interstate corporations. Generally, federal law provides immunity from state taxation to interstate corporations whose sole business in the taxing state is the solicitation of orders. Further, a taxpayer may only claim immunity when the totality of its in-state activities is ancillary to the solicitation process, with only a trivial exception. In this matter, the taxpayer employed a distributor sales manager, an account manager, two regional demo managers, and several in-store representatives in Maryland for the purpose of selling its products in the state.
The court ruled that several activities pursued by the taxpayer’s salesforce in Maryland, including (1) consumer-relations activities intended to build customer relationships and community goodwill; (2) product training designed to educate retailers; and (3) retail services including inventory management and competitive market research, systematically exceeded the scope of solicitation immunity. On appeal, it was noted that although some of the taxpayer’s activities were protected, the collection of competitive information by the account manager and in-store representatives was not ancillary to the solicitation and exceeded the protection granted to the solicitation of orders. Further, the collection of competitive information was not trivial or de minimus because it was a function of the account manager’s job responsibilities and was carried out regularly as a continuing matter of company policy. Accordingly, the taxpayer’s in-state activities weren’t immune from taxation, and the appeal was denied.
Blue Buffalo Company, Ltd. v. Comptroller of the Treasury, Maryland Court of Special Appeals, No. 495, Dec. 20, 2019
Final guidance on IRC Sec. 163(j) interest expense limitation issued
Massachusetts issued final guidance for corporate excise taxpayers on the IRC Sec. 163(j) business interest expense (BIE) limitation.
What is the BIE limitation?
Under IRC Sec. 163(j), a taxpayer’s business interest deduction cannot exceed the sum of:
- The taxpayer's business interest income for the tax year
- 30% of the taxpayer’s adjusted taxable income for the year
- The taxpayer's floor plan financing interest for the tax year
A taxpayer can carryforward any excess BIE from the current tax year to succeeding tax years.
The BIE limitation applies to tax years beginning after Dec. 31, 2017. It doesn’t apply to:
- Taxpayers with average annual gross receipts of less than $25 million for the three prior tax years
- Taxpayers engaged in certain trades
How does Massachusetts treat the BIE limitation?
Massachusetts follows the federal interest expense deduction under the current IRC for corporate excise tax purposes. The starting point for computing excise tax liability is federal gross income. So, Massachusetts follows the federal BIE limitation. It also allows the carryforward of excess BIE.
Taxpayers must compute the BIE deduction on a separate entity basis. A taxpayer must use current year BIE before any BIE carryforwards.
How does the BIE limitation apply to Massachusetts combined groups?
Each member of a combined group must calculate its Massachusetts BIE and BIE limitation on a separate entity basis:
- Without regard to any federal eliminations
- Taking into account eliminations for intercompany transactions
A member can share current year excess BIE or excess BIE carryfowards with other group members. It must use current year excess BIE, before any BIE carryfowards. If it cannot share its current year excess BIE with another member, it can carryfoward the excess to succeeding tax years.
Members that leave a Massachusetts combined group keep their BIE carryforward from prior years. A member that joins another Massachusetts combined group can deduct the BIE carryforward against its own separately determined income subject to its separately determined BIE limitation. But, the new member cannot share its BIE carryforward with another group member, unless that member was also a member of the same group in the year the new member incurred the BIE.
How does the BIE limitation interact with related member addback rules?
Massachusetts requires taxpayers to add back to net income related member interest expenses and costs. A taxpayer must apply the addback adjustments to its separately determined BIE on a separate entity and a preapportioned basis. The taxpayer must first reduce current year BIE by the amount of the required addback. It cannot deduct or carryforward any amount of BIE that is disallowed due to the add back.
Technical Information Release 19-17, Massachusetts Department of Revenue, Dec. 18, 2019.
Pass-through business alternative income tax enacted
New Jersey has enacted legislation creating:
- An elective entity-level alternative income tax for pass-through businesses.
- An offsetting credit to taxpayers who receive income from a pass-through business paying the alternative tax.
The new law takes effect immediately and applies to tax years beginning after 2019.
Elective entity-level alternative income tax
A pass-through entity with at least one member subject to New Jersey income tax on pass-through entity’s proceeds can elect to pay alternative tax. A pass-through entity is an S corporation, partnership, or a limited liability company. In order to pay at the entity level, all members of the entity must agree.
A pass-through entity paying the pass-through business entity income tax will be excluded from a combined group, and from filing a combined return, if:
- All of the members of the pass-through entity are taxpayers otherwise liable for the New Jersey gross income tax.
- No business entity taxed as a corporation has a direct, indirect, beneficial, or constructive ownership or control of the pass-through entity.
An entity electing to pay the alternative tax must make a return on or before the 15th day of the third month after the close of the entity’s tax year. Estimated tax payments will be due on the 15th of the fourth, sixth, ninth, and first month after the close of the tax year.
The tax rate on the share of each distribution will be:
- Under $250,000, 5.675% of the sum of proceeds.
- Over $250,000 but not over $1,000,000, $14,187.50 plus 6.52% of the excess over $250,000.
- Over $1,000,000 but not over $5,000,000, $63,087.50 plus 9.12% of the excess over $1,000,000.
- Over $5,000,000 $427,887.50 plus 10.9% of the excess over $5,000,000.
Taxpayers who are members of a business opting to pay the alternative income tax are allowed a refundable gross income tax credit. The amount of the credit is equal to the member’s pro rata share of the tax paid. The credit is applied against the gross income tax liability of the member in the tax year. The credit allowed to a trust or estate can be allocated to beneficiaries or used against the liability of the estate or trust.
A corporation that owns a pass-through business opting to pay the alternative income tax is allowed business tax credit. The credit may be carried forward for up to 20 years. The amount of the credit will equal the member’s pro rata share of the tax paid. The credit cannot reduce the corporation’s tax liability below the statutory minimum.
Ch. 2019-320 (S.B. 3246), Laws 2019, effective Jan. 13, 2020
Pass-through entity-level tax FAQs issued
Rhode Island provides answers to some frequently asked questions (FAQs) about the entity-level income tax that pass-through entities can elect to pay for tax years beginning after 2018. The entity-level tax allows pass-through entities, that do not normally pay income tax, to elect to pay Rhode Island state income tax. Some of the FAQs answered include:
- The rate of tax
- The definition of income
- Who is an owner of a pass-through
- How to make the election and pay the tax
- If the election continues in future years
- The benefit of making the election and the impact on state income taxes
- How to report the modification and credit
- The effect on withholding
Publication 2019-04 Pass-Through Entities, Rhode Island Department of Revenue, Division of Taxation, December 24, 2019
Texas adopts economic nexus threshold for franchise tax
Texas has adopted an economic nexus threshold for its franchise tax. This means that a foreign (non-Texas) taxable entity might have franchise tax nexus even if it has no physical presence in the state. The new economic nexus threshold is set forth in an amended franchise tax rule. The amendments are in response to the U.S. Supreme Court’s decision in South Dakota v. Wayfair, Inc., 138 S. Ct. 2080 (2018). The comptroller's office will apply the new economic nexus standard beginning with reports due on or after Jan. 1, 2020.
A foreign-taxable entity will be subject to the franchise tax if it has gross receipts from business done in Texas of $500,000 or more. This will create franchise tax nexus even if the entity has no physical presence in the state. Also, Texas will presume that a foreign-taxable entity has franchise tax nexus if it has a Texas use tax permit.
Thus, a foreign-taxable entity will begin doing business in the state on the earliest of:
- The date it has a physical presence in the state
- The date it obtains a Texas use tax permit
- The first day of the federal income tax accounting period in which it had gross receipts from business done in Texas in excess of $500,000
34 TAC Sec. 3.586, Texas Comptroller of Public Accounts, effective Dec. 29, 2019
If you have any questions, please contact your tax advisor.
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