The states covered in this issue of our monthly tax advisor include:
Taxpayer’s subsequent audit appeals weren’t barred by issue preclusion
A taxpayer was allowed to challenge a Colorado municipality’s sales and use tax assessment, even though another court had already issued an opinion in a similar appeal by the taxpayer.
The City audited the taxpayer for the 2003-2005 tax period. The audit resulted in a large assessment that the taxpayer appealed. The Jefferson County District Court (Jefferson court) upheld the assessment after finding the taxpayer didn’t meet its burden of proving that the assessment was incorrect.
The City then conducted a second and third audit for 2006-2008 tax years and 2009-2012 tax years. In these audits, the taxpayer gave the auditors more documentation and greater access to its tax records. The City’s audits resulted in assessments totaling over $6 million. The taxpayer appealed to the Denver District Court (Denver court). The Denver court ruled mainly in favor of the taxpayer and found that most of the transactions identified in the audit weren’t taxable.
The City appealed the Denver court’s ruling to the Court of Appeals. The City argued that under the doctrine of issue preclusion, the taxpayer couldn’t relitigate the taxability of the transactions in later audit periods. The Appeals Court held that the issues in the Jefferson court case and the Denver court case weren’t identical. Also, because the Jefferson court order didn’t specify which transactions were taxable, the taxpayer wasn’t prevented in the Denver case from arguing that specific transactions weren’t taxable.
The Denver court’s rejection of the application of issue preclusion was upheld. And, the taxpayer’s successful challenge to the second and third audits was affirmed.
IBM Corp. v. City of Golden, Colorado Court of Appeals, No. 2020COA26, Feb. 13, 2020
Marketplace economic nexus provisions enacted
Georgia enacted sales tax economic nexus provisions concerning marketplace facilitators. Effective April 1, 2020, marketplace facilitators must collect and remit Georgia sales tax on behalf of third-party sellers.
Economic threshold for marketplace facilitators
A marketplace facilitator is considered a dealer that must collect sales and use tax if it makes at least $100,000 in Georgia taxable sales of property or services in the previous or current calendar year. In calculating the $100,000 threshold, included are:
- The marketplace facilitator’s own sales.
- The sales it makes on behalf of all sellers in its marketplace.
A marketplace facilitator is a person that contracts with a seller to facilitate a taxable retail sale on the seller’s behalf by:
- Marketing, promoting, taking orders, or providing the physical or electronic platform to bring buyers and sellers together.
- Collecting or processing payments for retail sales on behalf of the marketplace seller.
A franchisor isn’t a marketplace facilitator with respect to any dealer that is its franchisee if:
- The franchisor and all of the franchisees had less than $500 million in annual gross sales in the United States in the prior calendar year.
- The franchisee holds a valid certificate of registration.
- The franchisor and franchisees have a valid contract stating that the franchisee will collect and remit all applicable taxes and fees.
Large marketplace sellers
A person isn’t a marketplace facilitator with respect to any dealer if:
- In the prior calendar year, the dealer made annual gross sales in Georgia of at least $500 million.
- The dealer holds a valid certificate of registration.
- The dealer and person have a valid contract providing that the dealer will collect and remit all applicable taxes and fees.
Act 322 (H.B. 276), Laws 2020, effective April 1, 2020
Rules proposed on IRC Section 163(j) interest expense limits and related-party addbacks
Illinois proposed changes to corporate income tax rules that would:
- Eliminate the related-party expense addback requirement for noncombination rule companies.
- Address the impact of the IRC Sec. 163(j) interest expense deduction limits on interest paid to 80/20 companies.
Noncombination rule companies
In 2017, Illinois repealed its “noncombination rule” for combined reporting. The rule prohibited unitary groups from including members that used different apportionment formulas. The change took effect for tax years ending on or after Dec. 31, 2017. A unitary group can now include all taxpayers regardless of the apportionment formula used by each taxpayer.
An 80/20 company is as any taxpayer that would be a member of a unitary business group, if it didn’t conduct 80% or more of its business activities outside the United States.
Public comment period
The public comment period is open for 45 days after Illinois published notice on the proposed rule changes. Illinois published the notice on Jan. 24, 2020.
86 Ill. Adm. Code Sec. 100.2430, as proposed by the Illinois Department of Revenue on Jan. 24, 2020
Treatment of federal extender legislation addressed
Kentucky will follow federal extender legislation for personal income deductions of:
- Qualified mortgage insurance premiums under IRC Sec. 163(h)
- Student tuition and expenses under IRC Sec. 222
- Mortgage debt forgiveness under IRC Sec. 108(a)
Press Release, Kentucky Department of Revenue, Jan. 23, 2020
Guidance issued on pass-through entity election
The Louisiana Department of Revenue has issued corporate income tax guidance on the election for pass-through entities to be taxed as if the entity had been required to file a federal income tax return as a C corporation. The governing statutes on the election also provide for an individual income tax exclusion for shareholders, members, and partners who would otherwise pay Louisiana income tax on the income that isn’t subject to tax at the entity level due to this election.
Making the election
Entities may make the election on or after Feb. 1, 2020, for taxable years beginning on or after Jan. 1, 2019. The election is made by submitting Form R-6980, Tax Election for Pass-Through Entities, and all required documentation to the Louisiana Department of Revenue via email at Section732.email@example.com.
Shareholders, members, or partners holding more than 50% of the ownership interest in the electing entity must approve the election. The determination of ownership interest will be made by examining the owners’ capital account balances. However, in the cases where shareholders don’t have capital account balances, the determination of ownership interest will be made by examining ownership percentages. Ownership can be evidenced by shares of stock, membership shares, or partnership shares.
Following review and verification of the documentation, the department will notify any requesting entities by email that the election has been approved. An approved election is effective for the entire taxable year for which it was made, as well as all subsequent years until the election is terminated.
Eligibility for pass-through entity exclusion
The legislation provides a pass-through entity exclusion for shareholders, members, or partners, and applies only to income that is taxed at the entity level. Further, the exclusion is only applicable to individuals who are shareholders, partners, or members of electing entities. Therefore, shareholders, members or partners who are corporations, estates, or trusts are not eligible for the exclusion.
Franchise tax implications
The guidance notes that the election legislation is silent on any potential franchise tax implications for entities that make the election. Therefore, the mere act of electing entity-level taxation won’t subject the entity to franchise tax liability.
Revenue Information Bulletin No. 19-019, Louisiana Department of Revenue, Feb. 5, 2020
New guidance provided on global intangible low-taxed income (GILTI)
Michigan released new guidance on how global intangible low-taxed income (GILTI) and related provisions impact Michigan income tax reporting. GILTI is a new category of foreign-sourced deemed income created by the federal Tax Cuts and Jobs Act. U.S. shareholders of controlled foreign corporations generally must include GILTI in gross income for federal tax purposes. This impacts the determination of federal taxable income (FTI) for corporations and adjusted gross income (AGI) for individuals, trusts, and estates.
GILTI for corporations
The Michigan corporate income tax return starting point includes the following items, to the extent included in FTI: GILTI, IRC Sec. 78 gross-up attributable to GILTI, and the IRC Sec. 250 deduction for GILTI. However, Michigan allows corporations to subtract net GILTI when calculating their tax base, Thus, adjusting the business income on their returns to remove these items would be ideal.
Most corporate taxpayers won’t have to include GILTI or IRC Sec. 78 gross-up attributable to GILTI in their sales factor for apportionment purposes. However, for taxpayers with no other business activity, GILTI and IRC Sec. 78 gross-up attributable to GILTI are income from an investment activity. Thus, they must include this income in their sales factor.
GILTI for individuals, trusts, and estates
An individual, trust, or estate may have GILTI from direct ownership of a foreign corporation. That GILTI is intangible nonbusiness income allocable to the taxpayer’s state of residence, to the extent included in AGI. If GILTI flows through to the owner of a flow-through entity, it’s business income subject to allocation and apportionment. The character of GILTI isn’t affected by making an election under IRC Sec. 962 to be taxed on GILTI at the corporate tax rate. If an IRC Sec. 962 electing taxpayer later receives an actual distribution from the foreign corporation, there is no Missouri adjustment to reduce the income included in more than one year of federal AGI.
GILTI that flows through to a flow-through entity owner must be included in the denominator of the sales factor for apportionment purposes. For an IRC Sec. 962 electing taxpayer, the denominator includes GILTI plus the IRC Sec. 78 gross-up, but not the IRC Sec. 250 deduction. If an IRC Sec. 962 electing taxpayer recognizes an actual dividend in a future year, the amount included in the sales factor is the amount recognized as income (after adjustment for federal taxes paid in the prior year). Flow-through entity owners must include GILTI in their sales factor numerator if the entity’s commercial domicile is in Michigan.
Notice: Income Tax Guidance on Global Intangible Low-Taxed Income (GILTI) for Corporations, Individuals, Trusts and Estates, Michigan Department of Treasury, Jan. 28, 2020
Net operating loss guidance for combined groups issued
New Jersey has provided guidance to corporation business taxpayers regarding net operating losses (NOLs) and combined groups. The Technical Bulletin explains various aspects of:
- Prior net operating loss conversion carryovers (PNOLs)
- Post-allocation NOLs
- NOL carryovers in a combined group context
For tax years ending before July 31, 2019, NOLs were calculated on a preallocation basis. For tax years ending on and after July 31, 2019, any of these unused unexpired NOL carryovers must be converted to allocated PNOLs. PNOLs are then used to reduce the allocated entire net income of the taxpayer.
PNOLs cannot be used to increase a current year loss. If the total combined group’s New Jersey return is positive, a member can use their own PNOLs to offset their portion of the group’s allocated entire net income. Members aren’t permitted to share PNOLs.
For tax years ending on and after July 31, 2019, New Jersey combined group NOL deductions and New Jersey combined group NOL carryovers are calculated on a post-allocation basis.
If the total combined group amount reported on the combined group’s New Jersey return is negative, that loss becomes the combined group’s post-allocation NOL. The taxable members of the combined group can carry over the loss for a maximum of 20 tax years. Taxable members can only share the combined group post-allocation NOLs with other taxable members that were part of the same combined group when the loss was generated.
When a new taxpayer joins an established combined group, the new member can bring with them any separate post-allocation NOL carryovers. However, the carryovers can only be used by the new member and cannot be shared with other members of the combined group.
If a member has activities that are independent of the activities of the combined group, the member is considered a partially included member of the group. If a partially included member has a loss, this loss becomes the member’s post-allocation NOL from its activities. This is a separate NOL and must be used as if it was a separate return loss. The member cannot share these separate post-allocation NOLs.
Technical Bulletin TB-95, New Jersey Division of Taxation, Feb. 18, 2020
Impact of federal extender legislation explained
A North Carolina Department of Revenue notice explains the impact of federal extender legislation on the state’s personal income tax returns.
Federal Extender Legislation
Federal legislation extended personal income deductions for:
- Qualified mortgage insurance premiums under IRC Sec. 163(h)
- Student tuition and expenses under IRC Sec. 222
- Mortgage debt forgiveness under IRC Sec. 108(a)
The temporary reduction in the medical and dental expense deduction under IRC Sec. 213 was also renewed. Taxpayers cannot deduct expenses that exceed 7.5% of their federal adjusted gross income (AGI). The AGI threshold is 10% for tax years after 2020.
North Carolina personal income tax laws follow the IRC as enacted on Jan. 1, 2019. This doesn’t include the federal extender legislation.
The legislature usually updates North Carolina’s IRC conformity date each year. Even if it updates the date, it can decouple from some of the federal extender legislation.
Impact on North Carolina returns
The starting point for determining North Carolina income tax liability is federal AGI. So, individuals may need to make North Carolina adjustments to federal AGI if the legislature:
- Doesn’t update the IRC conformity date.
- Decouples from the federal extender legislation.
Individuals can wait and see what the legislature decides after it starts its regular session in late April. But, a taxpayer will need to file a request for an automatic federal or state return filing extension by April 15, 2020, to avoid penalties.
Taxpayers who file a North Carolina return by the April 15 deadline may need to amend their return depending on actions by the legislature.
Important Notice: Impact of the FCAA of 2020 on Individual Income Tax Returns, North Carolina Department of Revenue, Feb. 3, 2020
CAT registration process for businesses with commercial activity in excess of $750,000 begins
Taxpayers having businesses with Oregon commercial activity in excess of $750,000 must register for the Corporate Activity Tax (CAT). Businesses that realized $750,000 in Oregon commercial activity on Jan. 1, 2020, must register by Jan. 31, 2020. Those businesses that crossed the $750,000 threshold in the days that followed are required to register in early February. Generally, once businesses reach the threshold of $750,000, they must register within 30 days. The CAT registration opened on Dec. 4, 2019.
Direct and automated payment functions for making payments of estimated tax liability will be available through Revenue Online in early February, before the first quarter estimated tax payment deadline of April 30, 2020.
To register, individuals doing business in Oregon will need their name, and their Social Security number or individual taxpayer identification number. Businesses will need their entity’s legal name and federal employer identification number. In any case, both individuals and businesses are required to provide: (1) a mailing address; (2) the date they exceeded or expect to exceed $750,000 in Oregon commercial activity; (3) a valid email address or current Revenue Online login, and; (4) their Business Activity Code (Refer to the current list of North American Industry Classification System codes found with their federal income tax return instructions.)
Taxpayers aren’t required to have a Revenue Online account to register for the CAT. Those who have Revenue Online accounts can’t be logged in to register for the CAT; instead they should go directly to the CAT webpage and click on the “Register for the CAT” link on the right-hand side of the page.
Press Release, Oregon Department of Revenue, January 22, 2020
Additional guidance provided on treatment of net losses from sale of investments and capital assets
Texas provides additional franchise tax guidance on the treatment of net losses from the sale of investments and capital assets in calculating gross receipts for apportionment purposes. Previously, the Comptroller of Public Accounts indicated that a net loss from the sale of all investments and capital assets shouldn’t be included in gross receipts everywhere. Also, a net loss from the sale of all Texas investments and Texas capital assets shouldn’t be included in Texas receipts. Now, the Comptroller provides more detailed information on the determination of net gain or loss for single entity taxpayers and combined groups for apportionment purposes.
Single entity taxpayer
A single entity taxpayer must add together all gains and losses from all sales of investments and capital assets included in total revenue for the accounting period. Generally, the net gain or loss will be the amount of total revenue reported on Form 05-158 in Item 6, Gains/Losses, if properly calculated. If the entity’s capital losses exceed its capital gains, the capital gains are reported as zero. If the combination of capital gains and ordinary gains and losses results in a net loss, the gross receipts everywhere from the sale of investments and capital assets are zero. If the combination results in a net gain, the net gain is the entity’s gross receipts everywhere from the sale of investments and capital assets. If the entity has Texas and out-of-state sales of investments and capital assets, it must make a separate calculation to determine Texas gross receipts by adding together Texas gains and losses. If the combination of Texas gains and losses results in a net loss, the entity’s Texas gross receipts from the sale of investments and capital assets are zero. If the combination of Texas gains and losses results in a net gain, the Texas net gain is reported as Texas gross receipts from the sale of investments and capital assets. The overall apportionment factor cannot be greater than one.
A combined group must add together all gains and losses from all sales of investments and capital assets included in the combined group’s total revenue for the accounting period. Generally, the net gain or loss will be the amount of total revenue the combined group reported on Form 05-158 in Item 6, Gains/Losses, if properly calculated. After separately calculating the combined group’s capital gains and the combined group’s ordinary gains and losses, the group must add its total capital gains with its total ordinary gains and losses to determine the amount of gains/losses to report as total revenue. If this combination results in a net loss, the combined group’s gross receipts everywhere from the sale of investments and capital assets are zero. If the combination results in a net gain, the net gain is the combined group’s gross receipts everywhere from the sale of investments and capital assets. If the combined group has Texas and out-of-state sales of investments and capital assets, it must make a separate calculation to determine Texas gross receipts by adding together Texas gains and losses. If the combination of Texas gains and losses results in a net loss, the combined group’s Texas gross receipts from the sale of investments and capital assets are zero. If the combination of Texas gains and losses results in a net gain, the Texas net gain is reported as Texas gross receipts from the sale of investments and capital assets.
Letter No. 202001008L, Texas Comptroller of Public Accounts, Jan. 22, 2020
Utah repeals income tax rate cuts and other changes
Utah has repealed previously enacted legislation (Ch. 1 (S.B. 2001), Laws 2019, Second Special Session) that cut the corporate and individual income tax rates beginning in tax year 2020. Other tax changes eliminated as a result of the repeal include:
- An increased personal exemption for purposes of the taxpayer tax credit.
- New grocery tax, Social Security tax, and earned income tax credits.
- A new tax credit rebate.
- An increased sales tax rate on food and food ingredients.
- Expanded imposition of sales and use tax to a range of services and items.
H.B. 185, Laws 2020, effective Jan. 29, 2020
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