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November 2017 SALT Shaker

November 2017 SALT Shaker

In this edition of the SALT SHAKER, we cover important State and Local Tax updates from New Jersey, New York, California, Pennsylvania,  South Carolina and Rhode Island for November 2017.

New Jersey

Limited Partner Deemed To Have Nexus In New Jersey

In the case of Preserve II Inc. v. Dir., Div. of Taxation[1], the New Jersey Tax Court has found that a corporate limited partner was deemed to have Corporation Business Tax (“CBT”) nexus. The taxpayer’s only connection with New Jersey was its investment in two partnerships operating in New Jersey. The taxpayer filed and paid CBT in prior years and later argued that it should not be subjected to any CBT as an investment company. Under the partnership agreements of the two partnerships, the taxpayer was a limited partner. The taxpayer cited BIS LP, Inc.[2] case which concluded that mere ownership in a limited partnership was not enough to establish nexus in New Jersey. The court responded that although BIS LP, Inc. was ruled as such, the final determination of the case depended on the situation and circumstances of each specific case. In the case of Preserve II, the taxpayer was as involved with the company’s operations as the general partners and was a limited partner only in name. After consideration, the taxpayer was deemed to have nexus in New Jersey, but also was considered to not be a passive investor of the partnership.

Deferred Income of Nonresident Hedge Fund Managers

In accordance with N.J. Rev. Stat. § 54A:5-8a(2), effective January 1, 2017, New Jersey Division of Taxation is going to consider deferred compensation deposited into offshore bank accounts taxable in New Jersey. The income is reportable on NJ-1040NR and is taxable, to the extent it is sourced to the state, in the same year as for the federal tax purposes under IRC § 457A.

Estate Tax Filing Update

The New Jersey Division of Taxation has released an updated estate tax filing requirement for resident decedents. The requirements are as follows:

  • before January 1, 2017 – Estate Tax return due on gross estates plus adjusted taxable gifts if exceeding $675,000
  • between January 1, 2017 and January 1, 2018 – Estate Tax return due on gross estates plus adjusted taxable gifts if exceeding $2,000,000
  • after January 1, 2018 – No new Jersey Estate Tax return is required.

New York

Refund of Sales Taxes Paid

In the Matter of Kroll Bond Rating Agency, Inc.,[3], the taxpayer, who provides security rating services, erroneously collected and remitted New York sales tax on its services. As it was unsure of the taxability of such services, the taxpayer requested an advisory opinion from New York State Department of Taxation and Finance (“the Department”). In the meantime, the taxpayer allocated a portion of the invoices’ amount to the sales tax and remitted the applicable amounts to the Department.

The advisory opinion was issued 18 months later and the Department concluded that the services were not subject to sales tax, but were subject to the New York City Tax on credit rating services. Upon requesting the refund of the sales tax remitted to the state, the taxpayer learned that the refund cannot be issued because the taxpayer’s clients did not receive the corresponding refund of the tax. On appeal, the taxpayer argued that it paid the tax on behalf of its customers and, therefore, its clients were not owed any refund. However, the administrative law judge ruled that since the clients paid the total amount per invoices that included the sales tax, the taxpayer was not entitled to a refund unless it demonstrated that the sales tax had been refunded to its clients.

Personal Liability Of Unpaid Sales Taxes

In the Matter of the Petition of Arthur Johnson[4], the New York Tax Appeals Tribunal concluded that as the corporate officer, the petitioner is personally liable for the sales tax due in relation to the assessment issued by the Department of Taxation & Finance (“the Department”) on audit. The Department audited the sales tax returns filed by A & J Security Patrol Agency, Inc (A& J) and assessed the additional tax due. The Department then attempted to collect the tax from the petitioner, who it deemed as the person responsible for collecting and remitting the sales tax for the period at issue. The Tribunal affirmed the conclusion previously reached by the Administrative Law Judge and sided with the Department stating that the petitioner “was a corporate officer and acted as a general manager of the business” and “himself testified that he was not only a corporate officer, but also registered the business in his name and ran the company”.

California

California Expands Voluntary Disclosure Program

Governor Brown signed into law Senate Bill No. 813, which expanded eligibility for Voluntary Disclosure Program (“VDP”) to include out-of-state trusts with California beneficiaries and non-resident partners of out-of-state partnerships. The bill also provides for VDP relief from the failure to file penalty for partnerships, S corporations and limited liability companies classified as partnerships. Prior to this expansion of the VDP, the out-of-state partnerships with nonresident partners, or out-of-state administered trusts with California beneficiaries were only eligible to enter into a Filing Compliance Agreement (“FCA”) with the Franchise Tax Board. Such agreement provided penalty relief only with reasonable cause and no limitation on the look-back period. The current VDP allows such entities to limit the look-back period to six years.

California Fire Relief

Following the  IRS announcement, the Franchise Tax Board (“FTB”) announced special tax relief for California taxpayers impacted by wildfires. An additional extension of time to file tax returns until January 1, 2018. The FTB will also follow these extended dates and will cancel interest and any late filing or late payment penalties that would otherwise apply. The relief is determined on a case by case basis and must be requested from the state. Various other states have also offered similar relief. Other notable FTB relief includes the ability to request free copies of state returns to replace lost or damaged ones by filing Form FTB 3516; and availability of the disaster loss deductions sustained in an area proclaimed by the Governor to be in a state of emergency.

Pennsylvania

Court Rules Against Cap on NOL Carryforward

For tax years beginning 2007 and on, Pennsylvania imposed a cap on NOL carryforward for corporate taxpayers. In tax year 2007 the cap was the lesser of 12.5 percent of taxable income or $3 million. As a result, the corporations with over $3 million of taxable income cannot reduce their income to zero. This limitation has been previously challenged in Nextel Communications of the Mid-Atlantic, Inc. v. Pennsylvania[5], and the court ruled against Pennsylvania stating that the result of this cap effectively created two classes of taxpayers – an environment where there is unequal treatment of taxpayers in similar situations solely based on their taxable income.

The current NOL limitation is the lesser of 30 percent of taxable income or $5 million. This cap, too, has been challenged in a recent case – RB Alden Corp. v. Pennsylvania[6]and Pennsylvania Commonwealth Court again ruled that the cap is unconstitutional citing Nextel. The Court concluded that Pennsylvania law “clearly provides that the amount of a taxpayer’s income is not a reasonable distinction on which to treat taxpayers differently.”

While Nextel is currently under appeal in the state Supreme Court, both rulings have a potentially significant effect on Pennsylvania’s budget, as other companies may claim refunds on prior year returns where this limitation resulted in tax liability.

South Carolina

Amazon Sales Tax Remittance

The South Carolina Department of Revenue is filing an injunction[7] in court for Amazon to collect and remit sales tax on all of its sales. Amazon currently only collects sales tax on items that are sold by Amazon and does not collect on third party sales. The state argues that the distribution center opened by Amazon creates physical presence in state and that requires it to collect sales tax on all sales. This hearing is currently under way and will take some time to make any determinations.

Rhode Island

Amnesty Program

Rhode Island has launched a website to provide additional details for the Tax Amnesty program that is beginning on December 1, 2017. The website provides one stop access to amnesty related information including included tax types, forms and frequently asked questions.

Ask Our Experts

To ensure compliance with U.S. Treasury rules, unless expressly stated otherwise, any U.S. tax advice contained in this communication is not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.

[1] Preserve II Inc. v. Dir., Div. of Taxation, N.J. Tax Ct., No. 010921-2013, 10/4/17

[2] BIS LP, Inc. v. Director, Div. of Taxation, 2014 N.J. Tax (App. Div. Apr. 11, 2014).

[3] Matter of Kroll Bond Rating Agency, Inc., DTA Nos. 826900 AND 827411, (N.Y.S. Div. of Tax App., Oct. 5, 2017).

[4] Matter of the Petition of Arthur Johnson, DTA Nos. 826174 (N.Y.S. Div. of Tax App., Oct. 27, 2017).

[5] Nextel Commcations of the Mid-Atlantic, Inc. v. Commonwealth , Pa., No. 6 EAP 2016, application for reargument filed 11/1/17)

[6] RB Alden Corp. v. Commonwealth of Pennsylvania, case number 73 FR 2011, before the Pennsylvania Commonwealth Court.

[7] Amazon Services, LLC vs. South Carolina Department of Revenue, Docket Number: 17-ALJ-17-0238-CC.

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