SC&H Group Blog: "Expertise Beyond the Numbers"

State & Local Tax Updates: California Sales & Use Tax; Connecticut Corporate Income Tax; and Montana Personal Income Tax

Through its content-sharing partnership with Thomson Reuters Checkpoint, SC&H Group’s State and Local Tax practice has compiled the following round up of actionable state tax news.

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California Sales And Use Tax — SBE responds to illegal sales suppression.
The California State Board of Equalization (SBE) is responding to the use of illegal sales suppression software by some businesses to evade paying their sales tax. Sales suppression software, often called “zappers,” allows users to remove or change sales transactions in electronic point of sale (POS) recordkeeping systems. The users then under-report their taxable sales by making it appear as if they sold less than they actually did. The software provides an unfair advantage over honest taxpayers and also cheats the state out of tax dollars. To fight illegal sales suppression, SBE auditors may make undercover buys of merchandise to determine if a suspected business is illegally suppressing sales, and if the auditors detect the use of sales suppression software, they will disregard the vendors reported sales and use recognized audit techniques, such as cash to credit card payment ratios and daily sales averages, to establish their taxable sales. Anyone caught using illegal sales suppression software could be sentenced up to three years in jail, fined up to $10,000, and be required to pay all illegally withheld taxes owed, including penalties and interest. The public can help the SBE fight illegal sales suppression by asking for a receipt when purchasing food, beverages, or other merchandise, especially when paying with cash, because the issuance of a receipt discourages dishonest businesses from removing or changing sales in their electronic records and helps the SBE identify those businesses that illegally suppress sales. ( California SBE Special Tax Notice L-386, 08/01/2014 .)

Colorado General Administrative Provisions — Bridge safety surcharge not a tax.
The Colorado Court of Appeals (the Court), affirming the trial court, has held that a bridge safety surcharge levied by the Colorado Bridge Enterprise (CBE) was a fee and not a tax. The Court noted that, unlike a tax, a special fee is not designed to raise revenues to defray the general expenses of government, but rather is a charge imposed upon persons or property for the purpose of defraying the cost of a particular governmental service. The Court concluded that the bridge safety surcharge fee was imposed solely for the purpose of financing the repair, reconstruction, and replacement of designated bridges, and not to defray the cost of general state expenses. The Court also noted that the Colorado General Assembly was very clear in the statutory scheme creating the CBE that it intended the bridge safety surcharge to be a fee, not a tax. The Court also affirmed the trial court’s holding that the CBE was an enterprise exempt from Taxpayer Bill of Rights (TABOR) requirements. TABOR requires “districts,” i.e., any state and local government excluding enterprises, to obtain voter approval in advance for increases in taxes and spending and debt increases. The Court concluded that the CBE, as a business providing a government service for a fee, met the definition of an enterprise for TABOR purposes. (Tabor Foundations v. Colorado Bridge Enterprise, Colo. Ct. App., Dkt. No. 13CA1621, 08/14/2014.)

Colorado Sales And Use Tax — Colorado manufacturing machinery exemption.
The Colorado Court of Appeals affirmed the lower court’s ruling granting the taxpayer’s motion for summary judgment. The taxpayer, a natural gas producer operating facilities in an enterprise zone, challenged a denial of a manufacturing machinery sales and use tax exemption with respect to pipelines and fittings used to gather natural gas from wells to processing facilities. The court reviewed the taxpayer’s activities to determine if the pipes and fittings could be considered machinery used in manufacturing for the purposes of qualifying for the exemption. Because the pipelines and fitting were used to “move material from one direct production step to another in a continuous flow” and because “extracting” and “processing” are both considered manufacturing under Colorado law, the exemption was deemed applicable. (Pioneer Natural Resources USA, Inc. v. Colo. Dept. of Rev., Colo. Ct. App., Dkt. No. 12CA1703, 08/14/2014.)

Connecticut Corporate Income Tax — Connecticut Neighborhood Assistance Act 2014 approved programs.
The list of 2014 Connecticut Neighborhood Assistance Act (NAA) programs approved by the Connecticut Department of Revenue Services (DRS) is now available. The NAA program is designed to promote funding for municipal and tax exempt organizations by providing a corporation business tax credit for businesses that make cash contributions to these entities. The credits are also available against the air carriers tax, the railroad companies tax, the utilities tax, the express, telegraph, cable and community antenna television system companies tax, the insurance tax and the business entity tax. Businesses may receive a credit of 60% of their approved contribution (or 100% in the case of certain energy conservation programs). Each business requesting a tax credit under the NAA Program must complete a separate Form NAA-02 (Connecticut Neighborhood Assistance Act Business Application) for each program that it wishes to sponsor. A contribution must be cash, and needs to be made in the corporation’s income year that corresponds to the same year as the approved program. Form NAA-02 must have an original signature and be mailed or hand-delivered to the DRS on or after September 15, 2014 but no later than October 1, 2014. (CT 2014 Neighborhood Assistance Act Credit Approved Programs, 08/15/2014.)

Connecticut Credits and Incentives — Connecticut Neighborhood Assistance Act 2014 approved programs.
The list of 2014 Connecticut Neighborhood Assistance Act (NAA) programs approved by the Connecticut Department of Revenue Services (DRS) is now available. The NAA program is designed to promote funding for municipal and tax exempt organizations by providing a corporation business tax credit for businesses that make cash contributions to these entities. The credits are also available against the air carriers tax, the railroad companies tax, the utilities tax, the express, telegraph, cable and community antenna television system companies tax, the insurance tax and the business entity tax. Businesses may receive a credit of 60% of their approved contribution (or 100% in the case of certain energy conservation programs). Each business requesting a tax credit under the NAA Program must complete a separate Form NAA-02 (Connecticut Neighborhood Assistance Act Business Application) for each program that it wishes to sponsor. A contribution must be cash, and needs to be made in the corporation’s income year that corresponds to the same year as the approved program. Form NAA-02 must have an original signature and be mailed or hand-delivered to the DRS on or after September 15, 2014 but no later than October 1, 2014. (CT 2014 Neighborhood Assistance Act Credit Approved Programs, 08/15/2014.)

Georgia Cigarette, Alcohol & Miscellaneous Taxes — Tobacco products at licensed premises—regulations adopted.
The Georgia Department of Revenue has adopted, effective August 13, 2014, amendments to Ga. Comp. R. & Regs. § 560-2-3-.04 “Products Other than Distilled Spirits for Sale, Display, or Offer” to provide that retailers of distilled spirits may sell or offer for sale, display, or keep in stock at its licensed premises the following products: cigarettes, cigars, chewing tobacco, alternative nicotine products, or vapor products, snuff, if properly licensed to do so, cigarette papers, lighters and matches, chewing gum, breath mints, manufactured packaged consumable single-serving snack items not requiring any preparation for consumption, single-serving pain medications, and over-the counter birth control devices.

Iowa Sales And Use Tax — Certificate of compliance updated.
The Iowa Department of Revenue has updated the state’s Streamlined Sales and Use Tax Agreement (SSUTA) certificate of compliance to reflect amendments to the agreement as approved by the Streamlined Sales Tax Governing Board through May 15, 2014. Among the changes are: an effective date of January 1, 2013 ( formerly scheduled for January 1, 2011) for the state to allow sellers not registered under the SSUTA to file a Simplified Electronic Return, and an affirmative response to the completion of the Library of Definitions and the Best Practices portion of the taxability matrix. Further, the state has marked that it is in compliance with the requirement that if it amends an existing provision of its taxability matrix, that it will relieve sellers and certified service providers who may have relied on a prior version of the taxability matrix from liability to the state and its local jurisdictions until the first day of the calendar month that is at least 30 days after notice of the change is submitted to the governing board. (May 2014 Certificate of Compliance, Iowa Dept. of Rev., 05/30/2014 (released 08/14/2014).)

Illinois Sales And Use Tax — Retroactive reinstatement—exemptions.
The Illinois Department of Revenue amended regulations (86 Ill. Admin. Code §§ 130.350 and 130.351, effective 07/31/2014), reflecting the retroactive reinstatement of the exemptions for coal and aggregate exploration, mining, off highway hauling, processing, maintenance, and reclamation equipment. The regulations add language including new kinds of exploration equipment, adding items commonly used as part of the coal and aggregate processes, and including equipment exempted in recent letter rulings. The amended regulations also state that the Department will not approve any claims or refunds on or after August 16, 2013, for taxes due or paid during the period beginning July 1, 2003 through August 16, 2013. The exemption for aggregate exploration, mining, off highway hauling, processing, maintenance and reclamation equipment will terminate by operation of the sunset provisions on August 16, 2018. Additionally, beginning July 1, 2014, a purchaser may only earn Manufacturer’s Purchase Credit (MPC) on purchases of qualifying manufacturing machinery and equipment, and purchasers claiming the aggregate or coal exemption cannot earn MPC. Finally, changes were made to the regulation headings to more accurately reflect the exemption.

Massachusetts Corporate Income Tax — Massachusetts angel investor credit—erratum.
Massachusetts Governor Deval Patrick vetoed and returned for further study provisions of a comprehensive economic development bill (H4377) creating an angel investor tax credit. We previously reported in an article in State & Local Taxes Weekly, Vol. 25, Issue 33, 08/18/2014 that H4377 creates a Massachusetts angel investor tax credit.

Massachusetts Personal Income Tax — Massachusetts angel investor credit correction.
Massachusetts Governor Deval Patrick vetoed and returned for further study provisions of a comprehensive economic development bill (H4377) creating an angel investor tax credit. We previously reported in an article in State & Local Taxes Weekly, Vol. 25, Issue 33, 08/18/2014 that H4377 creates a Massachusetts angel investor tax credit.

Montana Corporate Income Tax — 2014 S corporation income tax form changes.
The Montana Department of Revenue has updated several income tax forms and schedules for 2014. Form CLT-4S (2014 Montana S Corporation Information and Composite Return) has been updated to reflect the new Unlocking State Lands Program credit on Line 17 of Schedule II – Montana S Corporation Tax Credits. In addition, column B of Schedule III – Montana S Corporation Information, has been updated with a new entity type code “TE” for tax-exempt entity. (Montana News You Can Use, Mont. Dept. of Rev., 08/14/2014.)

Montana Corporate Income Tax — Montana zero wages and withholding filing requirements.
The Montana Department of Revenue reminds Montana employers with existing withholding accounts that paid no wages during a previous tax year that they are still required to submit Form MW-3 (Montana Annual Wage Withholding Tax Reconciliation), showing zero wages and withholding. In order to avoid receiving a non-filing letter from the Department, employers must file Form MW-3 by February 28. Form MW-3 can be filed electronically on Taxpayer Access Point (TAP). (Montana News You Can Use, Mont. Dept. of Rev., 08/14/2014.)

Montana Personal Income Tax — 2014 individual income tax form changes.
The Montana Department of Revenue has updated several income tax forms and schedules for 2014. Form 2 (2014 Montana Individual Income Tax Return) has been updated to reflect the new Unlocking State Lands Program credit on Line 44. Beginning with the 2014 tax year, the Unlocking State Lands program allows a Montana landowner to enter into a contractual agreement with the Montana Department of Fish, Wildlife and Parks to provide public recreational access where no legal public access currently exists. The landowner may be eligible to receive an annual tax credit in the amount of $500 per agreement (up to a maximum of $2,000 tax credit per year) for allowing such access. In addition, Schedules VI and VII on Form 2 have been consolidated. The schedules calculate the credit for an income tax liability paid to another state or country. In prior years, a full-year resident of Montana completed Schedule VI and part-year residents completed Schedule VII. For 2014, all calculations will occur on Schedule VI with specific line references within the calculation for each residency status. (Montana News You Can Use, Mont. Dept. of Rev., 08/14/2014.)

Montana Personal Income Tax — Zero wages and withholding filing requirements.
The Montana Department of Revenue reminds Montana employers with existing withholding accounts that paid no wages during a previous tax year that they are still required to submit Form MW-3 (Montana Annual Wage Withholding Tax Reconciliation), showing zero wages and withholding. In order to avoid receiving a non-filing letter from the Department, employers must file Form MW-3 by February 28. Form MW-3 can be filed electronically on Taxpayer Access Point (TAP). (Montana News You Can Use, Mont. Dept. of Rev., 08/14/2014.)

Montana Partnership — 2014 partnership income tax form changes.
The Montana Department of Revenue has updated several income tax forms and schedules for 2014. Form PR-1 (2014 Montana Partnership Information and Composite Tax Return) has been updated to reflect the new Unlocking State Lands Program credit on Line 17 of Schedule II – Montana Partnership Tax Credits. In addition, column B of Schedule III – Montana Partnership Information, has been updated with new entity type codes “D” for disregarded entity, “PTP” for publicly traded partnership, and “TE” for tax-exempt entity. The reporting requirement for Schedule III, column D, has also been changed. Beginning in 2014, partnerships will enter each owner’s share of Montana source income in column D. Prior to 2014, pass-throughs entered ownership percentage in column D. Finally, the calculations for the column totals on Line 8 have been changed. Beginning in 2014, pass-throughs will only report the total of all rows for columns D, E and F. Previously, pass-throughs subtotaled seven rows for each column. (Montana News You Can Use, Mont. Dept. of Rev., 08/14/2014.)

North Carolina Sales And Use Tax — Taxability matrix updated.
The North Carolina Department of Revenue has updated its taxability matrix, which provides the tax treatment of the definitions included in the Streamlined Sales and Use Tax Agreement, and includes changes effective August 1, 2014. (Streamlined Sales Tax Governing Board Taxability Matrix , N.C. Dept. of Rev., effective 08/01/2014.)

New York Credits and Incentives — START-UP NY Program—emergency rule readopted.
Effective July 17, 2014, the New York Department of Economic Development has readopted an emergency rule that adds Regulations 220.1 through 220.20 to Title 5 that establish procedures and guidelines for the START-UP NY Program. The regulations establish, among other things: (1) a process for the submission and approval of plans to designate Tax-Free NY Areas; (2) the eligibility criteria that will be applied in evaluating those plans; (3) a process for the evaluation and possible rejection of applications by businesses desiring to participate in the START-UP NY Program; (4) eligibility criteria that will be applied in evaluating those applications; (5) a process for terminating a business from the START-UP NY Program; and (6) a process for administrative appeals of such terminations. The START-UP NY Program provides tax incentives intended to help companies, especially high-tech and start-up businesses, start , grow, and stay in New York State.

New York Franchise Tax — START-UP NY Program—emergency rule readopted.
Effective July 17, 2014, the New York Department of Economic Development has readopted an emergency rule that adds Regulations 220.1 through 220.20 to Title 5 that establish procedures and guidelines for the START-UP NY Program. The regulations establish, among other things: (1) a process for the submission and approval of plans to designate Tax-Free NY Areas; (2) the eligibility criteria that will be applied in evaluating those plans; (3) a process for the evaluation and possible rejection of applications by businesses desiring to participate in the START-UP NY Program; (4) eligibility criteria that will be applied in evaluating those applications; (5) a process for terminating a business from the START-UP NY Program; and (6) a process for administrative appeals of such terminations. The START-UP NY Program provides tax incentives intended to help companies, especially high-tech and start-up businesses, start , grow, and stay in New York State.

New York Personal Income Tax — START-UP NY Program—emergency rule readopted.
Effective July 17, 2014, the New York Department of Economic Development has readopted an emergency rule that adds Regulations 220.1 through 220.20 to Title 5 that establish procedures and guidelines for the START-UP NY Program. The regulations establish, among other things: (1) a process for the submission and approval of plans to designate Tax-Free NY Areas; (2) the eligibility criteria that will be applied in evaluating those plans; (3) a process for the evaluation and possible rejection of applications by businesses desiring to participate in the START-UP NY Program; (4) eligibility criteria that will be applied in evaluating those applications; (5) a process for terminating a business from the START-UP NY Program; and (6) a process for administrative appeals of such terminations. The START-UP NY Program provides tax incentives intended to help companies, especially high-tech and start-up businesses, start , grow, and stay in New York State.

New York Real Property — Exemption application for Islip property authorized.
L. 2014, A8033 (c. 207), effective 08/07/2014, authorizes the town of Islip in Suffolk County to accept an application for real property tax exemption from the Family Service League, Inc.

New York Real Property — Exemption application for Brooklyn property authorized.
L. 2014, A8251 (c. 208), effective 08/07/2014, authorizes the assessor of the borough of Brooklyn to accept an application for exemption from real property taxes from Hebrew Alliance Brighton By The Sea, Inc. for a certain parcel of land located in the borough of Brooklyn.

Ohio Sales And Use Tax — SSUT certificate of compliance updated.
The Ohio Department of Taxation has updated its Streamlined Sales and Use Tax certificate of compliance to reflect that it has completed the Best Practices portion and Library of Definitions portion of the taxability matrix. In addition, the certificate reflects that if Ohio amends an existing provision of its taxability matrix, it will relieve sellers from liability to the state and local jurisdictions until the first day of the calendar month that is at least 30 days after notice of a change to the taxability matrix has been submitted to the Governing Board for having charged incorrect tax if the seller relied on the prior incorrect version of the taxability matrix. Finally, Ohio has adopted Compliance Review and Interpretations Committee (CRIC) definitions of “prepared food” and “soft drinks.” The revised certificate of compliance is effective August 1, 2014. (SSUT Certificate of Compliance, Ohio Dept. Tax., effective 08/01/2014.)

Pennsylvania Real Property — Philadelphia—extension of tax relief.
Philadelphia Bill No. 140278, effective August 5, 2014, extends the scope of tax relief available to elderly and low income property owners by providing that the Office of Property Assessments (OPA) has discretion to grant exceptions to the deadline for filing applications for the homestead exclusion, and applications for income-based tax deferral, where the property owner has presented evidence of hardship or other good cause. However, the extension of time for filing an application for the homestead exclusion may not extend beyond December 1 of the year prior to the year in which the tax is due, and no exception to the deadline for income-based tax deferral may be granted for an application received at or after the date that the Department of Revenue certifies that total deferrals equal the maximum permitted. The ordinance also authorizes the Department to provide an opportunity for taxpayers entering into payment agreements to apply for the homestead exclusion, tax deferral, the longtime owner-occupant exemption, and senior citizen low income special tax provisions. The OPA and Department are directed to promulgate regulations needed to effectuate these changes, and the Tax Review Board is authorized to review any adverse final determination by the Department with respect to an individual’s application for an exception, in a similar manner and with the same effect as a petition for review.

Pennsylvania Special Local Taxes — Credit for contributions to community development corporations.
Philadelphia Bill No. 140411, effective August 5, 2014, clarifies that contributions to community development corporations, nonprofit organizations engaged in developing and implementing healthy food initiatives and nonprofit intermediaries must be made in the year for which the credit is sought, unless the Department of Revenue has agreed to an extension. Any extension granted may not be for more than twelve months; and will be based on a finding that the taxpayer’s circumstances present good cause for delayed payment, and that denying the extension would cause hardship to the Qualifying Organization.

Tennessee Real Property — Valuation of office building reduced.
An Administrative Judge for the Tennessee State Board of Equalization (SBE) has reduced the valuation of an office building in downtown Knoxville, TN from $34 million to $28.5 million for both 2013 and 2014. The property owner was able to demonstrate to the Administrative Judge that the capitalization rate should be increased because gross revenue and net operating income had been declining for several years. The property owner was also able to convince the Administrative Judge that the parking revenue cited by the Assessor for the building was overstated. (Hertz Knoxville One, Tenn. SBE, Dkt. No. 87348, 08/13/2014.)

Tennessee Real Property — Higher capitalization rate for office building.
An Administrative Judge for the Tennessee State Board of Equalization (SBE) has reduced the valuation of an office building in downtown Knoxville, TN from $44.3 million to $37 million for both 2013 and 2014. The property owner was able to demonstrate to the Administrative Judge that the capitalization rate should be increased because gross revenue and net operating income had been declining for several years. (Tennessee Holdings LLC, Tenn. SBE, Dkt. No. 89169, 08/13/2014.)

Tennessee Sales And Use Tax — Taxability matrix.
The Tennessee Department of Revenue has updated its Streamlined Sales and Use Taxability Matrix to reflect current conformity with the Streamlined Sales and Use Tax Agreement as amended through May 15, 2014. The matrix became effective on August 1, 2014. (Taxability Matrix, Tenn. Dept. of Rev., 08/01/2014.)

Texas Cigarette, Alcohol & Miscellaneous Taxes — Cigarettes and tobacco products fee ruled unconstitutional.
The Texas Court of Appeals has ruled that Texas’ fee on cigarette and tobacco products is unconstitutional as violating the state’s Equal and Uniform Clause. Subchapter V of the Texas Health & Safety Code imposes a fee on cigarettes and cigarette tobacco products manufactured by non-settling and subsequent participating manufacturers (i.e., it is stipulated that this fee is a tax). In Texas, taxation must be equal and uniform meaning that the legislature may pursue public policy goals through tax legislation, but those goals must be related to the taxation, and a tax statute will be upheld if it treats differently those engaged in the same business so long as a reasonable basis justifies the disparate treatment (i.e., “reasonableness” focusses on the subject matter of the tax and not the entity being taxed). In this case, the subject matter is the same (i.e., cigarettes or cigarette tobacco products), but the tax is only imposed on tobacco manufacturers who did not enter into prior settlement agreements with the state for the purposes of protecting the settlement agreements, funding the various programs that receive money from those tobacco manufacturers who entered into those settlement agreements, and attempting to protect the settling tobacco manufacturers from losing market share to the non-settling manufacturers. The unequal treatment of these identical products is not justified because: (1) the tax protects one company’s market share over another’s; (2) the tax is imposed on only one class of identical products for the implementation of public policy goals; (3) the manufacturers subject to the tax are not released from past and future claims as afforded to manufacturers who entered into settlement agreements; and (4) the manufacturers subject to the tax do not earn interest and have no opportunity to regain any of the funds that are not used to satisfy claims leveled against the companies by the state (i.e., the tax does not go into an escrow account, but, rather, goes into the state’s general revenue fund). (Combs et al. v. Texas Small Tobacco Coalition and Global Tobacco, Inc., Tex. Ct. App. (3rd Dist.), No. 03-13-00753-CV, 08/15/2014.)

Texas Real Property — Tax increment financing—county energy transportation reinvestment zones.
The Texas Attorney General has opined that a county’s use of tax increment financing to fund transportation projects in a county energy transportation reinvestment zone could be subject to constitutional challenge as violating the state’s equal and uniform taxation requirements, and a county creating such a zone cannot place general revenue funds into the tax increment account. A county is authorized to create an energy transportation reinvestment zone to fund transportation improvements in areas affected by oil and gas exploration activities, create a tax increment account, and establish an ad valorem tax increment base year. However, the Texas Constitution enables the legislature to grant the authority to issue tax increment bonds to incorporated cities and towns, but is silent with regard to counties. Absent an enabling constitutional amendment, authorization for counties to pledge tax increments to the zone could be subject to challenge under the equal and uniform provision. Further, a county cannot fund the tax increment account with general revenue funds because the statutory provision governing the zone does not expressly include general revenue funds (i.e., the provision expressly provides funding from taxes collected on property in a zone only), and committing general revenue beyond a year is unconstitutional debt. (Attorney General Opinions, GA-1076 , 08/14/2014)

West Virginia Special Local Taxes — Revised local B&O returns.
The Cities of Charleston, Clarksburg and Fairmont have issued revised business and occupations (B&O) returns. The revised Charleston return removes a line that provided a rate and code for the “manufacturing” classification. The Clarksburg return adds a notation advising taxpayers that they must have a valid City of Clarksburg business license before the B&O payment can be processed; and Fairmont has created separate returns for monthly, quarterly and annual filing.

West Virginia Sales And Use Tax — Municipal sales tax—purchases outside city limits.
The West Virginia Attorney General has issued an opinion letter stating that municipal sales tax may not be collected on sales and services outside the boundaries of the municipality. The letter was issued in response to a question asking whether a particular municipality’s sales tax applied to citizens and businesses located within a zip code that is beyond the physical boundaries of the municipality. The letter states: “Based upon careful review of the West Virginia Constitution and the West Virginia Code, we believe that a municipality’s sales or use taxes may apply only to sales or services received within the municipality’s boundaries.  As a result, such a tax may not be levied on transactions that occur within the same ZIP code as a town but beyond the town’s boundaries.” The attorney general further noted that application of the tax outside the boundaries of the municipality would violate both the legislature’s limited grant of taxing authority and the plain text of the town’s own ordinance. (Press Release: Attorney General Patrick Morrisey Says Municipal Sales Tax May Not Be Collected on Purchases Outside City Limits, W.V. Attorney General, 08/13/2014.)

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