In this edition of the SALT SHAKER, we cover important State and Local Tax updates from New Jersey, Florida, Pennsylvania and District of Columbia for March 2019.
As part of the federal Tax Cuts and Jobs Act of 2017, certain U.S. taxpayers are subject to effectively a new tax known as the Global Intangible Low-Taxed Income (GILTI). The one redeeming effect of GILTI is that it yields a deduction for certain taxpayers, known Foreign-Derived Intangible Income (FDII). In a nutshell, the GILTI, functions as a global minimum tax, on business groups with foreign activities, and some relief may be provided through the FDII deduction. In recent months, states have been issuing guidance on how to treat GILTI and FDII, and Pennsylvania is one the latest states to do so within the Tax Bulletin 2019-02, as issued on January 24, 2019.
Corporate tax treatment:
The calculation for Pennsylvania taxable income begins with the amount of taxable income reported on the federal tax return. For federal income tax purposes, GILTI is taxed similarly to how Subpart F income was in the past. Pennsylvania had treated Subpart F income as dividend income and will apply the same treatment to GILTI income. In conclusion, GILTI will be included in the Pennsylvania corporate income tax base.
The characterization of GILTI income as dividend income will provide the taxpayer to offset some of the income with a dividends received deduction (DRD), depending on the U.S. shareholder’s ownership. Furthermore, the IRC § 250 deductions for GILTI and FDII are considered special deductions for federal purposes, and Pennsylvania has stated they do not conform to the special deduction for CNIT purposes. Therefore, Pennsylvania will suggests they will disallow the GILTI and FDII deductions, but provide a DRD as some relief.
Lastly, Pennsylvania does not include dividend income in the sales apportionment factor; therefore, GILTI income will be excluded for state apportionment purposes.
Personal tax treatment:
Pennsylvania also provided additional guidance on personal tax within the same bulletin. The state, specifically describes dividends as distributions in cash or property made out of current or accumulated earnings and profits. For federal purposes, GILTI is considered a “deemed dividend” regardless of the actual distribution of cash. As such, Pennsylvania will not tax GILTI as a dividend for personal income tax purposes until the cash is received by the taxpayer, consistent with a cash-basis methodology.
New Jersey will transition to mandatory combined reporting for taxpayers with year-ends ending on and after July 31, 2019. The New Jersey Division of Taxation has recently explained in a bulletin issued January 3, 2019 (TB-86) which entities are included and excluded in the combined group.
The state defines a combined group in N.J.S.A 54:10A-4(z) as “having common ownership and are engaged in a unitary business, where at least one company is subject to tax under this chapter, and shall include all business entities, except as provided for under any section of the Corporation Business Tax Act”.
The included entity types of a combined group are as follows:
Each member of the combined group is subject to a $2,000 minimum tax if it has nexus with New Jersey. No entity is subject to the minimum tax if they do not have nexus with the state. However, the members cannot claim PL 86-272 protection in regards to the minimum tax if they have nexus.
The Division of Taxation specifies that while disregarded entities are not classified as a member of the combined group, the tax attributes are still included in income on the New Jersey return under the member that owns the disregarded entity. However, disregarded entities will not be subject to the $2,000 minimum tax.
The District of Columbia, along with California, New York, and Texas have recently enacted new legislation or guidance in response to United States Supreme Court ruling in South Dakota v. Wayfair, Inc., 585 U.S. ___ (2018). As we recently covered separately in another article concerning New York; now a focus on the District of Columbia, The “Internet Sales Tax Emergency Amendment Act of 2018,” as enacted on December 31, 2018, will require sellers without a physical presence in the District to collect and remit sales tax, which went into effect on January 1, 2019.
The district has established a bright line threshold of:
If a remote seller exceeds either of those thresholds in the current or previous year, they will now be required to collect and remit sales tax.
In addition, marketplace facilitators will be required to collect and remit sales tax effective April 1, 2019.
The legislation also amended the definition of a retail sales to include the sale of digital goods to be “digital audiovisual works, digital audio works, digital books, digital codes, digital applications and games, and other taxable tangible personal property electronically delivered, streamed, or accessed singly, by subscription, or in any other manner.” The only items specifically excluded from sales tax are cable television and radio services, which are separately subject to the gross receipts tax. Sales of streaming services were previously subject to the gross receipts tax, but starting in 2019, will now be subject to sales tax instead.
The Florida Department of Revenue has released a Technical Assistance Advisement on February 14th, 2019 relating to a taxpayer’s inquiry in how to source its sales from services for apportioning for Florida corporate income tax. The Department concluded that the taxpayer “should source its income from different types of services it provides to the location of the customer to which the services are provided, on a market basis.” (Florida Technical Assistance Advisement No. 18C1-011, 09/27/2018, released 02/14/2019.)
Note that this contrasts to the Fla. Admin. Code Ann. §12C-1.0155; with the state using out-of-state cases as part of its analysis in forming its conclusion.
In the issued advisement, the state says that, “In analyzing the income producing activity, the most important factor to determine is where the customer is located.”