In this edition of the SALT SHAKER, we cover important State and Local Tax updates from New York, Texas, Georgia, Indiana, Ohio, Connecticut and Pennsylvania for March and April 2018.
MULTISTATE – Multiple States Release Their Treatment of Repatriation Income
One of the immediate impacts of the “Tax Cuts and Jobs Act” (“TCJA”) has been the impact on corporations and individuals via the Repatriation Transition Tax.
This tax is imposed on foreign earnings that until the passage of the TCJA have been not been subject to federal income tax. Under the TCJA, accumulated foreign earnings held by Controlled Foreign Corporations (“CFCs”) of a U.S.-based shareholder are repatriated and taxed federally at a rate of 15.5% on cash and cash equivalents and 8% on illiquid assets. The business or individual shareholder may then elect to pay the resulting federal income tax liability over an eight-year period.
Conformity to international provisions such as foreign-source dividend exemption and repatriation of offshore earnings depend on a state’s foreign income treatment of Subpart F, and even then many states are silent beyond their conformity to the Internal Revenue Code as to individual tax impact.
Many states are therefore specifically addressing their treatment, and Withum focuses on those states particularly affecting our clients at issue.
- For corporations:
- Entire net income is to be determined without the amount of any federal deduction allowed pursuant to IRC section 965(c), as well as the amount of any federal deduction allowed pursuant to IRC section 250(a)(1)(A).
- There is no additional deduction under IRC section 965(c) allowed to New York taxpayers, nor will New York conform to the federal deduction that results in repatriated earnings being taxed at a beneficial rate.
- For individuals:
- The net IRC § 965 amount is required to be included in both federal adjusted gross income and New York taxable income.
- There is no New York exemption or deduction for this income for individuals (including S corporation shareholders).
- Individual taxpayers are required to pay the additional New York tax generated by the § 965 amount in the tax year it is recognized and included in FAGI and not over the 8 year period provided under federal law, and only S corporation shareholders may defer the tax liability until specified triggering events happen in the future.
- For corporations:
- The deemed repatriation dividends will be excluded from entire net income. If a corporation does not meet the ownership thresholds, the deemed repatriation dividends will be included in entire net income to the extent provided in the Act.
- For individuals:
- Dividends are an enumerated category of income. Thus, deemed repatriation dividends reported under IRC Section 965 must be included in New Jersey gross income in the same tax year and in the same amount as reported for federal purposes.
- For businesses:
- Section 965 income will be included in a corporation’s federal Subpart F income and Subpart F income is included in the definition of federal taxable income. As the starting point in computing Pennsylvania corporate taxable income is federal taxable income before NOLs and special deductions, the repatriated amounts will be subject to Pennsylvania corporate net income tax.
- Because the deduction allowed under section 965(c) is not a “special deduction” it will likewise be allowed for Pennsylvania purposes. The Pennsylvania dividends-received deduction applies to the net amount of repatriated income.
- Because the repatriated income is treated as dividend income for Pennsylvania tax purposes, it will be excluded from the sales factor entirely.
- There is no Pennsylvania election to defer payment of the tax on repatriated income over an 8-year period.
- For individuals:
- Repatriated income will not be treated as taxable dividend income and is therefore not subject to Pennsylvania tax unless an actual distribution of cash is made to a Pennsylvania individual income taxpayer.
- For corporations:
- Taxpayers must report their IRC Sec. 965 income on their 2017 Connecticut return as Connecticut “conforms to the federal rule that such income is recognized and must be included on a taxpayer’s return for its last taxable year beginning before January 1, 2018.
- Connecticut does not allow a taxpayer to elect to defer payment of any portion of the tax associated with its IRC Sec. 965 income.
- Connecticut treats “Subpart F income” as dividend income; as IRC Sec. 965 income is treated as Subpart F income for federal tax purposes, Connecticut will treat such income as dividend income.
- For individuals:
- No adjustment is required on the “CT1040”; net IRC Sec. 965 income is reported on IRS Form 1040 as “other income” and thus is included in federal adjusted gross income, which is the starting point for determining Connecticut resident’s income tax liability
Please reach out to our group for further guidance on your particular state.
Legislation Introduced to Offset State and Local Tax Deduction Limit Imposed by the TCJA
The Governor has signed legislation reforming the state tax code to provide alternative benefits to New York taxpayers to take advantage of both individual charitable contributions and employer payroll taxes paid by employers, as both retain their full federal tax deductibility.
The advent of the Tax Cuts and Jobs Act yielded among its changes and limitation a cap on the State and Local property tax deduction for federal purposes of no more than $10,000. To a high tax jurisdiction such as New York, the effect is immediate and costly.
To counter its impact, New York is the first state to have passed methods to provide for a way for taxpayers to avail themselves of state tax payments that, in theory, would qualify for exception to the federal cap:
- The first is an Optional State Payroll Tax (“employer compensation expense tax”),
- This would constitute an employer assessed payroll tax which provides for a commensurate credit against state income tax liability, as employer-side payroll taxes remain fully deductible
- The tax assessed on employers would be phased in over three years and amount to 5% on payrolls over $40,000, and provide benefit to those employees taxed a credit equivalent to the value of the employer compensation expense tax
- Though commentary on this portion of the law suggests it may likely pass legal scrutiny, employers would consequently reduce employee compensation by the amount of the additional payroll tax being paid – something difficult to explain and implement to a business’s employees.
- Contributions to State and Local Charitable Funds in lieu of taxes
- The legislation provides for two state-run charitable funds (for health care and education respectively) that individual taxpayers could donate to receive tax credits in return equal to 85% of their donation.
- There is also an additional provision for optional local charitable funds to fund schools and other local programs, with the tax credits received decided by the local governments.
- Note that the tax credit amounts to only 85 percent for state tax liability and 95 percent for local liability
- Far more skepticism is being applied to the success of this solution, as the payment of such “”contributions” in lieu of taxes may fail to qualify under federal law as true charitable contributions.
State Amnesty Program Begins May 1, 2018
The Texas Tax Amnesty Program is due to initiate May 1, 2018, and will run through June 29, 2018, providing delinquent taxpayers who meet the requirements of the program with relief from penalties and interest on outstanding taxes due.
The amnesty applies to periods prior to Jan. 1, 2018, and only includes liabilities that have not been previously reported to the Comptroller’s office.
Note that the Amnesty is not applicable to taxpayers that have been:
- certified to the Office of the Attorney General
- presently in litigation
- currently under audit or for which a notice of audit has been issued;
- under judgment.
The Amnesty period applies to all taxes except local motor vehicle tax, IFTA taxes, PUC gross receipts assessments or unclaimed property payments.
Use Tax Reporting Legislation Passed
The State of Georgia passed House Bill 61, requiring certain retailers to collect and remit sales and use tax or comply with specified notice and reporting obligations.
The Bill qualifies “delivery retailers” as “retailers that do not collect and remit the state’s sales and use tax” and which either in the previous or current calendar year:
- Earned gross revenue exceeding $250,000 from retail sales delivered within Georgia
- Conducted 200 or more retail transactions for delivery within Georgia
Delivery retailers, beginning January 1, 2019, must comply with three notice and reporting requirements.
These requirements consist of:
- A time-of-sale notice to be delivered to each potential purchaser that use tax may be due
- To send (by January 31 of each year) an annual statement to customers with purchases totaling $500 or more indicating those purchases on which use tax is due
- Filing a copy of such annual statement with the Department by January 31 of each year.
Penalties for failure to comply include $5 for each of the unsent transactional notices and $10 for each of the annual statements.
Note that the implementation of this requirement may be overturned depending upon the outcoming of the presently pending Wayfair case being decided before the U.S. Supreme Court.
Legislation Passed to Deem Software as a Service as Nontaxable
Indiana recently passed Senate Bill 257, exempting Software as a Service (“SaaS”) from taxability under the state’s sales tax laws. Effective July 1, 2018, all transactions in which an end-user “purchases, rents, leases or licenses the right to remotely access prewritten computer software” over
- Private or public networks
- Wireless media
is not considered a retail sale transaction and not subject to sales and use tax.
The bill does indicate that all retail transactions involving “selling, renting, leasing or licensing the right to use prewritten computer software delivered electronically” are taxable. This exemption is set to apply through July 1, 2024.
Clarification on the Situsing of Service Receipts for CAT Purposes
In the Defender Security Company v. Testa case decided on by the Ohio Board of Tax Appeals, the situs of sourcing for services as they pertain to Commercial Activity Tax (“CAT”) was adjudicated based on the taxpayer’s denied refund claim.
For Ohio CAT Purpose, gross receipts from the sale of services are sitused to Ohio in the proportion that the purchaser’s benefit in Ohio with respect to what was purchased bears to the purchaser’s benefit everywhere with respect to what was purchased.”
The physical location where the purchaser ultimately uses or receives the benefit of what was purchased determines the proportion of the benefit in Ohio.
The Taxpayer is an authorized dealer for ADT Security Services, selling security equipment as well as contracting for security monitoring services, which it then resells directly to ADT in exchange for a fee.
The taxpayer filed an application for refund for CAT related to those taxes paid on gross receipts related to those fees, arguing the gross receipts should be sourced outside Ohio as ADT receives the benefit of the contracts outside Ohio. The Taxpayer’s position on the situsing of the receipts was to the contract beneficiary’s principal place of business as the purchaser of the alarm services contracts, where the contracts were received.
The Board of Tax Appeals denied the claim, deciding instead the receipts should be sitused to the underlying security services from which the fee stems. The benefit of the purchase was determined to be not the location of the beneficiary but where the security services were being performed, which was Ohio. The Board rejected the position that ADT received no benefit in Ohio from the contracts it purchased, as they would not exist without the in-state property providing the underlying services.
 BTA No. 2016-1030 (03/06/2018).