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EisnerAmper Blog

An EisnerAmper State And Local Tax Blog

EITC: Helping Your Local School Can Help Your Business

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July 20, 2015

By Dan Piasecki

The Educational Improvement Tax Credit (“EITC”) is an opportunity for businesses and business owners to reinvest in their communities by making a charitable contribution to qualified educational improvement, scholarship and pre-K organizations.  In exchange for the contribution, the business will receive a tax credit of up to 90% of the value of the contribution to be used against various Pennsylvania taxes including (but not limited to):

  • Corporate Income Tax;
  • Capital Stock Tax; and
  • Personal Income Tax. 

A list of qualified organizations can be found on the Pennslyvania Department of Community and Economic Development’s website .

Time is of the essence as there is a limited amount in the tax credit pool. Credits are issued on a first-come, first-serve basis.  The application period opens July 1 each year. Once all the credit money is allocated, a taxpayer must wait until the following July 1 to try again.   

The business community has overwhelmingly responded to this Program. Since its inception in 2001, more than 23,500 applications have been approved pledging in excess of $657 million dollars to the programs.  When you combine the benefits of a federal charitable contribution and the state tax credits, many businesses receive a benefit that exceeds the amount of the contribution.  Don’t wait to take advantage of this opportunity. 

For more information and application contact your tax advisor.  Additionally, there is a program summary on the Department’s website.

SALT Update – June 2015

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July 14, 2015

By David Venanzi

Each month, we’ll bring you a quick synopsis of critical state and local tax changes, to help you look for opportunities and avoid significant snags.

South Carolina Grants Department of Revenue Authorization to Enact a Tax Amnesty

Effective June 8, 2015, South Carolina Governor Nikki Haley signed a bill to amend the Code of Laws of South Carolina to allow the SC Department of Revenue to establish a 3-month amnesty period. During this period, the Department of Revenue will waive delinquent tax penalties and interest. Please click here for more details.

Maryland Releases Information Regarding 2015 Tax Amnesty Program

The Maryland Comptroller has released information regarding their 2015 Tax Amnesty Program that will run from September 1, 2015 through October 30, 2015. Amnesty applications must be received or postmarked no later than October 30, 2015. Please click here for more details.

Missouri Governor Signs Legislation Authorizing Tax Amnesty

On April 27, 2015, Missouri Governor Jay Nixon signed legislation that will authorize and create a tax amnesty program that will waive all penalties, additions to tax, and interest. The tax amnesty program will run from September 1, 2015 to November 30, 2015. Please click here for more details.

Tennessee Out-of-State Retailer Nexus

Effective July 1, 2015, Tennessee now has a rebuttable presumption that out-of-state retailers have nexus, and must collect sales and use tax. This is dependent on the retailer paying an in-state party fees or commissions to refer the customers to the retailer. Please click here for more details.

Nevada Enacts Annual Commerce Tax

Effective July 1, 2015, Nevada Governor Brian Sandoval singed into legislation an annual commerce tax. This tax is imposed on all entities engaged in business in Nevada whose Nevada gross revenue is greater than $4 million. Please click here for more details.

Texas Governor Signs Franchise Tax Reduction Act

On June 15, 2015, Texas Governor Greg Abbott signed the Franchise Tax Reduction Act of 2015. This act makes various changes to the franchise tax rates for reports originally due on or after January 1, 2015 but before January 1, 2016 and reports originally due on or after January 1, 2016. Please click here for more details.

Florida District Court of Appeal Determines Violation of Commerce Clause for In-State and Out-of-State Communication Services

The Florida District Court of Appeals determined on June 11, 2015 that Florida statute section 202.12(1) is unconstitutional and discriminates against interstate commerce which is a violation of the Commerce Clause. This stems from a 2005 suit filed in which the trial court held that section 202.12(1) does not violate the Commerce Clause because it does not benefit in-state economic interests. Please click here for more details.

Philadelphia Tax Changes and Updates

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June 30, 2015

Wilk, MatthewBy Matthew Wilk


As a result of the Philadelphia City Council adopting several ordinances including the authorization of a budget for the city’s 2016 fiscal year last week, there are numerous tax rate changes for various Philadelphia taxes.  All of the changes are effective as of July 1, 2015 or for the 2015 tax year.  Below is a summary of the changes. 

In addition to the tax rate changes, there have been significant events that impact Philadelphia taxpayers.  These events potentially provide opportunities that may be pursued.  After the summary of rate changes, there are descriptions of the events and potential opportunities.

TAX RATE CHANGES

Wage Tax and Earnings Tax:
  
Resident rate is decreased to 3.9102% (previously, 3.92%)
Nonresident rate is decreased to 3.4828% (previously, 3.4915%)
  Change is effective as of July 1, 2015

Net Profits Tax:  

Resident rate is decreased to 3.9102% (previously, 3.92%)
Nonresident rate is decreased to 3.4828% (previously, 3.4915%)
 Change is effective for the 2015 Tax Year

School Income Tax:  

Resident rate is decreased to 3.9102% (previously, 3.92%)
Nonresident are not subject to the School Income Tax. 
 Change is effective as of July 1, 2015

Use & Occupancy Tax:

The tax rate is increased to 1.21% (previously, 1.13%).
The basic exemption is decreased to $165,300 (previously, $177,000)
 Change is effective as of July 1, 2015

Parking tax (for off-street/garage parking):

The tax rate is increased to 22.5% (previously, 20%)
 Change is effective as of July 1, 2015

Real Estate Tax:

The total tax rate is increased to 1.3998% (previously, 1.34%)
  Change is effective for the 2016 Tax Year

The incremental reductions to the Wage, Earnings, Net Profits, and School Income taxes are a continuation of reductions over numerous years. 

The increases in the Use & Occupancy, Real Estate and Parking taxes are specifically targeted to help fund the Philadelphia School District’s budget.  

OTHER EVENTS IMPACTING PHILADELPHIA TAXES

Credits are not the same as refunds

For several years, the Philadelphia Department of Revenue has administered taxpayer overpayments and credits similarly to potential taxpayer refunds and applied a three-year statute of limitations.  Thus, if a taxpayer did not request a refund of an overpayment and/or credit on its account within the three-year statute of limitations for a refund, the statute of limitations was deemed to have closed by the Department for the taxpayer to “request” the overpayment and/or credit.  The Department would then take the overpayment and/or credit from the taxpayer’s account and essentially take the funds into the Department’s income. 

Last week, the Tax Review Board published three decisions on this practice by the Department concerning the Business Income and Receipts Tax and the Wage Tax.  In all three decisions, the Board held that overpayments and credits are separate and distinct from “refunds” and thus are not subject to the three-year statute of limitations per Sec. 19-1703.  Similar cases are pending in the judicial system as the City continues to defend its position.  Taxpayers that may have lost overpayments or credits as a result of the Department’s practice should consider the merits of taking legal action to reobtain the lost funds. 

Maryland Comptroller v. Wynne – possible refund opportunity for Philadelphia Residents

Last month, the U.S. Supreme Court issued its ruling in Comptroller of the Treasury of Maryland v. Wynne, holding that Maryland’s income tax scheme violated the Commerce Clause as internally inconsistent, and thus unconstitutional on its face.  The key issue of the Wynne case was that Maryland residents were not provided a credit for taxes paid to other jurisdictions against their the local portion of the Maryland income tax.  The Court held the lack of a credit mechanism created the imposition of a tariff that resulted in unconstitutional double taxation.  It would appear that Philadelphia Net Profits, Wage, and School Income taxes have a similar issue because Philadelphia residents are not permitted a credit for taxes paid to other jurisdictions. 

Any Philadelphia residents who paid taxes on their net profits or wages to state or local jurisdictions other than Philadelphia may want to consider filing refund claims with the Tax Review Board.  Likewise, businesses such as partnerships that pay a significant amount of taxes to other jurisdictions, with significant Philadelphia resident ownership, may also want to consider filing refund claims. 
The Wynne case involved some unique facts.  The Philadelphia Department of Revenue is still considering the impact of the decision.  Thus, taxpayers should understand the application of the Wynne decision to Philadelphia taxes is not free from doubt.  At this point, any claim for refund will likely be denied and may require appeals through the administrative and judicial systems. 

Please contact your tax professional if you have any questions.

Philadelphians Wynne, New Yorkers Wynne-Less

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May 29, 2015

By Gary C. Bingel, CPA and Matthew Wilk

Wilk, MatthewBingel, GaryOn Monday, May 18, 2015, the U.S. Supreme Court issued its ruling in Comptroller of the Treasury of Maryland v. Wynne, holding, in a 5-4 decision, that Maryland’s tax scheme violated the Commerce Clause as internally inconsistent, and was thus unconstitutional on its face.

Background

Maryland’s personal income tax scheme in question has two components: a state component and a county component.  Similar to most states, Maryland taxes its residents on their entire income wherever it is earned. Maryland also taxed non-residents on their portion of income earned within Maryland’s borders.  Maryland permits its residents a credit for the income taxes they pay to other states.  However, this credit is only applicable against the state level tax.  Maryland does not allow a credit against the county component of the tax.  The state tax and county tax have the same tax bases, and are filed on the same return.

Brian and Karen Wynne were shareholders of an S corporation doing business in 39 states. In 2006, they paid income tax to most of those states on the income that flowed through to their individual return. On their Maryland return, the Wynnes claimed a tax credit for taxes paid to other states. The Maryland Comptroller permitted the Wynnes to claim a credit against the state income tax, and denied a credit on the county income tax.

The Decision

The Court analyzed the case under the Commerce Clause of the U.S. Constitution.  In order to pass scrutiny under the Commerce Clause, a tax must be both internally and externally consistent.  The Court focused on the internal consistency analysis.  In order to be internally consistent, no more than 100% of income can be subject to taxation if every jurisdiction imposes an identical tax.

In the case at hand, Maryland taxed residents on their entire income, as well as non-residents on their share of income earned within Maryland, and only offered a partial credit to residents for taxes paid to other jurisdictions.  If every state had an identical tax, more than 100% of a person’s earned income would be subjected to taxation since they would pay tax on all their income in their resident state, and a portion of their income in their non-resident state, and only get a partial credit.  Thus, the Maryland tax scheme was held to violate the Commerce Clause as it was internally inconsistent because:

  1. Residents are taxed on their entire income, wherever earned;
  2. Non-residents are taxed on the portion of their income earned within the state; AND
  3. Maryland did not provide a full credit for taxes paid to other jurisdictions to Maryland residents against their Maryland state and county income tax.

Going forward, Maryland residents who were denied a full credit may qualify for refunds for prior years still open under the statute of limitations, as well as potentially take a full credit against both the state and county levels of tax.  Per the Maryland Department of Revenue’s website, “further action is being considered” and “taxpayers are advised to speak with a tax professional to determine whether the case affects them.”

The Implications in Other Jurisdictions

Accordingly, in order for a similar tax in another jurisdiction to fail the internal consistency test, the following three factors must all be present:

  1. Residents must be taxed on their entire income, wherever earned;
  2. Non-residents must be taxed on the portion of their income earned within the state; AND
  3. Less than a full credit must be given to residents for the portion of income taxed in other jurisdictions.

City of Philadelphia

Philadelphia imposes two taxes, the Net Profits Tax and the Wage Tax, that appear to meet the three criteria set forth above and thus fail the internal consistency test of the Commerce Clause.
 
The Net Profits Tax is an income tax imposed on unincorporated entities, including partnerships, doing business in Philadelphia.  The tax considers whether there are resident and non-resident partners, members, and proprietors of the taxpayer.  While the portion of the tax attributable to non-residents partners, members, and proprietors is apportioned, the portion attributable to Philadelphia residents is not apportioned.  Also, there is a lack of a credit mechanism to grant resident partners a credit for taxes paid to other jurisdictions.  The Wage Tax operates in a similar fashion – Philadelphia residents are taxed on their entire wages, without any type of offsetting credit, and non-residents are taxed on the wages earned within the city.
 
Accordingly, any Philadelphia residents who paid taxes on their wages to local jurisdictions other than Philadelphia may want to consider filing for refunds based on the taxes paid to such other jurisdictions.  Likewise, businesses such as partnerships that pay a significant amount of taxes to other localities (such as for New York City’s Unincorporated Business Tax), with significant Philadelphia resident ownership, may also want to consider filing for refunds.  Due to the interaction of the Philadelphia Business Income and Receipts Tax credit against the Net Profits Tax, this issue can be highly fact-sensitive.

New York

While it may appear at first glance that the Wynne decision has some application for New York City residents, upon closer examination it appears otherwise.  While New York City taxes its residents on 100% of their income, and declines to offer any credit for taxes paid to other jurisdictions, the fact that it fails to tax nonresidents renders it internally consistent, thereby differentiating it from Maryland tax scheme analyzed in the Wynne case, and saving it from a Constitutional review. 

There may be an argument that New York’s statutory residence scheme, under which statutory residents are taxed on 100% of their investment income, is internally inconsistent.  However, one potentially important distinction may be that the Wynne case involved earned income, as opposed to investment/passive income.  While one would think the same principles should apply regardless of the type of income involved, the Wynne Court appeared to limit its holding to earned income, and cases often are decided on such minor distinctions.   Further, taxpayers may have been permitted credits in their other resident state for taxes paid to New York.  That being said, those individuals who have been subjected to significant double-taxation on investment income in New York City and New York State may want to consider filing refund claims for open years in order to preserve their rights.

Ironically, New York has had a chance to remedy this inequitable (and possibly unconstitutional) dilemma for close to twenty years.  In October 1996, the New York Department of Taxation and Finance signed the North Eastern States Tax Officials Association (“NESTOA”) Cooperative Agreement on Determination of Domicile.  This cooperative agreement addressed these very issues of revenue sourcing and dual residency, and would avoid the issues confronted in Wynne.  Unfortunately, New York failed to enact this agreement into law, and has refused to follow the provisions of the agreement. 

Tennessee Enacts Significant Business Tax Changes

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May 27, 2015


Wilk, MatthewBy Matt Wilk

On May 20, 2015, Tennessee Governor Haslem signed into law HB 644, which is known as the Revenue Modernization Act.  Earlier in the legislative session, Governor Haslem stated the intent of the Act is to “level the playing field in terms of sales tax and business taxes.”   The “leveling” refers to the tax burden on in-state and out-of-state companies doing business in Tennessee.
  
The Act institutes a myriad of changes including factor nexus and market sourcing for franchise and excise tax purposes, click-through nexus for sales tax, the inclusion of SaaS as taxable computer software, and an alternative tax for taxpayers that sell massive quantities of product to distributors located in Tennessee.   Following is a brief summary of the key provisions of the Act. 
 
Factor Nexus

The Act provides for a bright-line factor nexus standard modeled after the UDITPA provision for both the excise (business income) tax and the franchise tax.  In this case, $500,000 of sales to Tennessee customers is sufficient to create a “substantial nexus in [Tennessee]” and subject the business to both the excise and franchise taxes regardless of any physical presence.
 
The Act does not address the application of P.L. 86-272.  However, the federal protection against state income tax for taxpayers whose activity is limited to the mere solicitation of tangible personal property should still apply to the excise tax, but no similar protection is afforded for franchise tax purposes.
 
This change is applicable to tax years starting on or after January 1, 2016. 
 
Deduction for Related Party Intangible Expense

Related party intangible expenses are generally required to be added back to Tennessee taxable income, after which Tennessee permits a deduction if certain requirements are satisfied such as “substantial business purpose” and “tax avoidance” is not its principal purpose.  The Act amends the deduction provision to require the taxpayer to show “clear and convincing evidence” the Commissioner’s denial of the deduction was incorrect.  This clarification of the taxpayer’s burden of proof decreases the taxpayer’s ability to justify the deduction.
 
This change is applicable to tax years starting on or after January 1, 2016. 

Market-Based Sourcing

The Act shifts the construction of the sales factor numerator from “costs of performance” to “market” for sales “other than sales of tangible personal property.”  Service revenue will be sourced to the state in which the service is delivered.  Intangible receipts will generally be sourced to the state in which the intangible is used.  If the “state of assignment” for both service and intangible revenue cannot be determined or reasonably approximated then the receipts are to be excluded from both the sales factor numerator and denominator. 

This change is applicable to tax years starting on or after January 1, 2016.
 
Alternative Additional Tax for Large Sellers of Goods to Distributors in Tennessee 

Presumably as a response to pending litigation by companies in the pharmaceutical industry, Tennessee has enacted an alternative tax for taxpayers that have sales in excess of $1 billion to Tennessee distributors in which the Tennessee distributor will attest that the product’s ultimate destination is outside Tennessee.  The alternative tax is a gross receipts tax upon “Certified Distribution Sales.”  The alternative tax has a graduate rate that starts at 0.5% for Certified Distribution Sales of $2B and less, and then is incrementally reduced to 0.125% for sales in excess of $4 billion.
  
The alternative tax is elective by the taxpayer, but is also in addition to the traditional franchise and excise taxes.  Taxpayers that elect to use the alternative tax are permitted to exclude Certified Distribution Sales from the numerator of the sales factor for franchise and excise tax apportionment purposes.  Therefore, taxpayers that may have Tennessee sales approaching $1B should evaluate the impact of electing into the new alternative tax to determine if electing into the new alternative tax creates a more favorable tax result.  The evaluation should also include the taxpayer’s ability to use tax attributes it may have such as depreciation, credits and NOLs.

Sales Tax Click-Through Nexus

As part of the rapid trend across many states, the Act institutes click-through nexus for sales tax purposes.  A taxpayer that engages a third party located in the state to “directly or indirectly” refer potential customers to the taxpayer and the taxpayer’s sales from this referral activity exceeds $10,000 annually is assumed to have nexus for sales tax purposes.  The assumption may be rebutted but only by “clear and convincing” evidence. 

This change is applicable to transactions starting on or after July 1, 2015.  

Expanded Sales Tax on Computer Software

The Act has extended the tax on computer software to include software that is accessed remotely in a similar manner as software that is delivered in tangible form or electronically.  The definition of use of computer software has been expanded to include “the right to access and use software that remains in the possession of the dealer …” If the software is accessed by a user located in Tennessee then it may be subject to Tennessee sales tax as if the software was electronically delivered.  If the purchaser has users located both in and out of Tennessee that will access the software then the tax can be allocated based upon the proportion of the software accessed by users in Tennessee.
 

It is important to note that the Act does not subject all services that may be considered software as a service (“SaaS”) to sales tax.  Specially, the new provision states its intent is not to impose a tax on otherwise exempt services “such as information services, payment processing services, internet access, or the mere storage of digital products, digital codes, or computer software.”  Thus, all transactions should be reviewed to identify the true object of the transaction to determine if it is a non-taxable service or the remote access of taxable software.
 
This change is applicable to transactions starting on or after July 1, 2015.  Considering the effective date for this provision creates some complication for contracts that started prior to July 1 but continue after July 1.  The new provision does not provide any guidance on how to handle contracts that straddle the effective date.        

Click-Through Nexus

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May 15, 2015

Click-through nexus legislation creates a rebuttable presumption of nexus when a seller makes sales of tangible personal property, specified digital products or services via a commissioned independent contractor who directly or indirectly refers potential customers, by a link on an Internet website or otherwise, to the seller. In most states, there is a dollar amount that must be met in order to achieve the substantial nexus standard referenced in Quill Corp. v. North Dakota, 504 U.S. 298 (1992). Rebuttable standards and dollar thresholds vary by state.

In 2008, New York enacted Tax Law §1101(b)(8)(vi), popularly referred to as the “Amazon law.” For the first time, a state attempted to require an internet retailer to collect and remit sales taxes based on the idea of click through nexus since the Supreme Court’s 1992 decision in Quill where physical presence was required to establish constitutional nexus. The Amazon law created a rebuttable presumption that an out-of-state online retailer has nexus with New York if the seller enters into an agreement with a New York resident to refer customers to the online retailer’s website for a commission (e.g., via a link on the resident’s website). The connection between the remote seller and the presumed solicitation activities of the New York resident created a physical presence nexus that required the registration and collection of New York sales or use tax.

In spite of Quill, a number of states have already passed legislation to subject out-of-state taxpayers, in particular internet retailers, to sales and use tax nexus—and the list is growing. Currently, states including Arkansas, California, Colorado, Connecticut, Florida, Georgia, Kansas, Michigan, New Jersey, New York, North Carolina, Pennsylvania, Rhode Island, and Vermont all have click through nexus provisions. At least five other states are considered legislation to enact click through provisions. 

Most recently, Tennessee Governor Bill Haslam’s proposed Revenue Modernization Act passed the House. The legislation requires out-of-state online retailers to collect sales and use tax from Tennessee customers if the online retailer pays an in-state party a fee or commission to route customers to the online retailer’s website. Other states, including Hawaii, South Carolina, Indiana, and Utah, appear to be emboldened to enact click-through nexus legislation during their current legislative sessions. These states are proposing legislation similar to the New York law that will adopt a rebuttable presumption that out-of-state retailers have nexus in the taxing state.

The federal government has long considered granting states the right to impose a sales tax collection requirement on out-of-state vendors selling into the state, either through the internet, by phone, or by mail-order. The Marketplace Fairness Act of 2013 (“MFA”), approved by the Senate two years ago and currently being reworked by the House, would grant that right to states with simplified sales tax. For a variety of political reasons, national legislation concerning state tax technical issues has been unsuccessful over the years. As the states grow tired of waiting for federal lawmakers to act, many are implementing (or already have implemented) their own provisions including click through nexus policies.

Click-through nexus is not a panacea to increase tax revenue and/or “level the playing field.” States including Rhode Island, Illinois, North Carolina and New Jersey have not seen the positive impact they expected. There are several reasons for the underperformance including:

  1. A lack of compliance and the difficultly to police potential out of state retailers.
  2. Effective strategic and tax planning by some e-tailers have limited the increased compliance and thus revenue. Some e-tailers have eliminated their affiliate programs to render click-through nexus rules moot, or have restructured their marketing, advertising and supply chain practices to limit nexus.  

All taxpayers should periodically review their business relationships with third parties to determine the impact to their sales and use tax registration and filing requirements. Any questions regarding registration and filing requirements or the internet sales tax should be directed to your state and local tax professional.

Maryland Authorizes Tax Amnesty Program

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April 21, 2015

By Matthew Wilk

 On April 14, Maryland Governor Larry Hogan signed into law SB 763, which requires a tax amnesty program be held from September 1, 2015 to October 30, 2015.  The amnesty program requires the Maryland comptroller to abate 100% of penalties and 50% of interest for participating taxpayers. 

 Eligible Taxes:

  • Corporate Income Tax;
  • State and Local Personal Income Tax;
  • Withholding Taxes;
  • Sales & Use Tax; and
  • Admissions & Amusement Taxes. 

Eligible Taxpayers:

  • Non-Filers;
  • Underreporting of Tax liability;
  • Nonpayment of Tax liability. 

    ***Taxpayers that previously participated in the 2001 or 2009 amnesty programs or the Intangible Holding Company Settlement Program of 2004 are not eligible to participate in the 2015 program. ***

Taxpayers Benefits:

  • Full abatement of civil monetary penalties;
  • 50% abatement of interest accrued through October 30, 2015 (taxpayers that enter into a payment agreement will be subject to 100% of interest accrued after October 30, 2015); and
  • Prohibition of any criminal charges for participating taxpayers (however, this does not apply to pending criminal charges or criminal charges under current investigation).


Amnesty Requirements:

  1.  Returns, tax and 50% of interest must be paid by October 30, 2015; or 
  2.  At the comptroller’s discretion, the comptroller permits the taxpayer to enter into an agreement to make all payments of tax and 50% of interest on or before December 31, 2016.


Unlike the recent amnesty programs in New Jersey and Massachusetts which were limited to previously assessed and outstanding tax liabilities, the Maryland amnesty program is much broader and offers non-filing taxpayers as well as underpaid and nonpaid taxes to be included.  The amnesty does not offer a limited lookback period, so taxpayers may need to evaluate the benefits of a voluntary disclosure vs. participating in the 2015 amnesty program.  For more information, please contact your state and local tax professional.

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