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

State & Local Tax Updates: California Credits and Incentives; Indiana Personal Income Tax; and Ohio Sales & Use 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 Corporate Income Tax — California Competes Tax Credit—aggregate amount of annual allocation.
L. 2014, A1560 (c. 378), effective 09/17/2014, authorizes the Director of Finance to increase the aggregate amount of the California competes tax credit that may be allocated to taxpayers each fiscal year by $25 million per fiscal year through the 2017–2018 fiscal year.

California Corporate Income Tax — California enacts new film credit.
L. 2014, A1839 (c. 413), effective 09/18/2014 and applicable as noted, establishes a credit under the corporate income and franchise tax laws similar to the existing credit under those laws that is applicable to tax years beginning on or after January 1, 2011, and that is equal to an applicable percentage of qualified expenditures attributable to the production of a qualified motion picture in California (but qualified expenditures for the existing credit are not allowed to be qualified expenditures for the new credit). The credits under the bill apply for tax years beginning on or after January 1, 2016, and are to be allocated by the California Film Commission on or after July 1, 2015, and before July 1, 2020. The bill, as compared to the existing tax credits, extends the scope of the new credit for a qualified motion picture to the applicable percentage of qualified expenditures up to $100 million; extends the credit to qualified expenditures for television pilot episodes; and determines an applicable percentage of 25% or 20% for qualified expenditures, with an additional credit amount available in certain specified circumstances. The bill limits the aggregate amount of the new credits to be allocated in each fiscal year to up to $330 million (under the existing law, up to $100 million may be allocated in any fiscal year through the 2016–2017 fiscal year), and subject to a computation and ranking of applicants based on the jobs ratio (the existing credits are allocated by the California Film Commission on a first-come, first-served basis) requires the California Film Commission to allocate credit amounts subject to specified categories of qualified motion pictures. For tax years beginning on or after January 1, 2016, the bill allows, in lieu of the credits authorized under the corporate income and franchise tax laws, a credit against qualified state sales and use taxes (a similar in-lieu-of sales tax credit is available with respect to the existing credit). Also, for tax years, beginning on or after January 1, 2016, the bill allows the new credit to reduce the tentative minimum tax (the existing credit cannot reduce the tax below the tentative minimum tax).

California Credits and Incentives — California Competes Tax Credit—aggregate amount of annual allocation.
L. 2014, A1560 (c. 378), effective 09/17/2014, authorizes the Director of Finance to increase the aggregate amount of the California competes tax credit that may be allocated to taxpayers each fiscal year by $25 million per fiscal year through the 2017–2018 fiscal year.

California Credits and Incentives — New film credit is enacted.
L. 2014, A1839 (c. 413), effective 09/18/2014 and applicable as noted, establishes a credit under the corporate income and franchise tax laws and the personal income tax law similar to the existing credits under those laws that are applicable to tax years beginning on or after January 1, 2011, and that are equal to an applicable percentage of qualified expenditures attributable to the production of a qualified motion picture in California (but qualified expenditures for the existing credits are not allowed to be qualified expenditures for the new credit). The credits under the bill apply for tax years beginning on or after January 1, 2016, and are to be allocated by the California Film Commission on or after July 1, 2015, and before July 1, 2020. The bill, as compared to the existing tax credits, extends the scope of the new credit for a qualified motion picture to the applicable percentage of qualified expenditures up to $100 million; extends the credit to qualified expenditures for television pilot episodes; and determines an applicable percentage of 25% or 20% for qualified expenditures, with an additional credit amount available in certain specified circumstances. The bill limits the aggregate amount of the new credits to be allocated in each fiscal year to up to $330 million (under the existing law, up to $100 million may be allocated in any fiscal year through the 2016–2017 fiscal year), and subject to a computation and ranking of applicants based on the jobs ratio (the existing credits are allocated by the California Film Commission on a first-come, first-served basis) requires the California Film Commission to allocate credit amounts subject to specified categories of qualified motion pictures. For tax years beginning on or after January 1, 2016, the bill allows, in lieu of the credits authorized under the income and franchise tax laws, a credit against qualified state sales and use taxes (similar in-lieu-of sales tax credits are available with respect to the existing credit). Also, for tax years, beginning on or after January 1, 2016, the bill allows the new credit under the corporate income and franchise tax laws to reduce the tentative minimum tax (the existing credit cannot reduce the tax below the tentative minimum tax).

California Fuels And Minerals — Local motor vehicle fuel taxes.
L. 2014, A2752 (c. 345), effective 01/01/2015, updates the voter-approval requirement for imposing a local motor vehicle fuel tax from a majority vote to a two-thirds vote. The update conforms the statutory language to the requirement in the California Constitution that a local government obtain a two-thirds voter approval in order to impose, extend, or increase any special tax.

California Personal Income Tax — California Competes Tax Credit—aggregate amount of annual allocation.
L. 2014, A1560 (c. 378), effective 09/17/2014, authorizes the Director of Finance to increase the aggregate amount of the California competes tax credit that may be allocated to taxpayers each fiscal year by $25 million per fiscal year through the 2017–2018 fiscal year.

California Personal Income Tax — New film credit is enacted.
L. 2014, A1839 (c. 413), effective 09/18/2014 and applicable as noted, establishes a credit under the personal income tax law similar to the existing credit under that law that is applicable to tax years beginning on or after January 1, 2011, and that is equal to an applicable percentage of qualified expenditures attributable to the production of a qualified motion picture in California (but qualified expenditures for the existing credit are not allowed to be qualified expenditures for the new credit). The credits under the bill apply for tax years beginning on or after January 1, 2016, and are to be allocated by the California Film Commission on or after July 1, 2015, and before July 1, 2020. The bill, as compared to the existing tax credits, extends the scope of the new credit for a qualified motion picture to the applicable percentage of qualified expenditures up to $100 million; extends the credit to qualified expenditures for television pilot episodes; and determines an applicable percentage of 25% or 20% for qualified expenditures, with an additional credit amount available in certain specified circumstances. The bill limits the aggregate amount of the new credits to be allocated in each fiscal year to up to $330 million (under the existing law, up to $100 million may be allocated in any fiscal year through the 2016–2017 fiscal year), and subject to a computation and ranking of applicants based on the jobs ratio (the existing credits are allocated by the California Film Commission on a first-come, first-served basis) requires the California Film Commission to allocate credit amounts subject to specified categories of qualified motion pictures. For tax years beginning on or after January 1, 2016, the bill allows, in lieu of the credits authorized under the corporate income and franchise tax laws, a credit against qualified state sales and use taxes (a similar in-lieu-of sales tax credit is available with respect to the existing credit).

Indiana Personal Income Tax — Preservation of tax return transmittal envelope.
The Indiana Tax Court has ruled that the Indiana Department of Revenue did not have a statutory duty to preserve a taxpayer’s tax return transmittal envelope. Pursuant to Ind. Code § 6-8.1-3-6 , the Department must maintain copies of all tax returns filed with the Department for a period of three years. In this case, the taxpayer claimed that the Department had purposefully destroyed, mutilated, or lost a transmittal envelope and obstructed discovery with respect to a proposed assessment that the taxpayer was challenging. The taxpayer argued that the Department’s Records Retention and Disposition Schedule, pursuant to Ind. Code § 6-8.1-5-2 , required the Department to preserve both the income tax return and the related transmittal envelope for a period of six years. However, the court disagreed, concluding that neither the Department’s Retention Schedule nor Ind. Code § 6-8.1-3-6 expressly refer to the retention of tax return transmittal envelopes or define the term “tax return”; in addition, no Indiana statute or regulation defines the term “tax return.” Consequently, the court defined the term “tax return” consistent with its plain, ordinary, and usual meaning, which indicates that an Indiana individual tax return means only the forms used in reporting and computing an individual’s tax liability, not the transmittal envelopes used for mailing those forms. (Popovich v. Indiana Department of State Revenue, Ind. Tax Ct., Cause No. 49T10-1010-TA-53, 09/18/2014.)

New Jersey General Administrative Provisions — Dishonored electronic funds transfers.
L. 2014, A1162 (c. 46), effective 09/10/2014, provides a process for payees to recover payments which were dishonored for lack of funds or because the maker does not have an account with them. This new law does not increase penalties; it merely takes existing provisions for bad checks, drafts and orders of withdrawal and applies them to dishonored payments made by electronic funds transfers.

New Jersey General Administrative Provisions — Criminal penalties for dishonored electronic funds transfers.
L. 2014, A1153 (c. 45), effective 09/10/2014, provides that a person commits a crime if he or she authorizes an electronic funds transfer knowing that it will not be honored. The degree of the crime and the associated penalties depend on the amount of the payment.

Ohio Sales And Use Tax — Responsible party determination affirmed.
The Ohio Board of Tax Appeals (BTA) affirmed the determination of the Tax Commission finding that the taxpayer was properly assessed for unpaid sales and use tax as a responsible party for M&S Auto Group LLC. Although the taxpayer argued that he lacked financial control of M&S and was merely an investor in the business who was not involved in its day-to-day operations, the evidence showed that he had an overall 50% interest in the business, signed two loan agreements at the time of M&S’s formation and personally guaranteed both loans, had check signing authority, found new investors when capital was needed for the business, and paid outstanding sales taxes upon discovering they had not been paid by M&S. Considering all these facts, it was clear that the taxpayer had responsibility for financial obligations and that his responsibilities were strictly financial in nature. As the taxpayer failed to satisfy his burden to demonstrate error by the commissioner, the assessments were affirmed. (Wilson v. Testa, Ohio BTA, Dkt. No. 2013-1349, 09/19/2014.)

Oregon Real Property — County may challenge its own valuation on appeal.
The Oregon Supreme Court held that Or. Rev. Stat. § 305.287 , which allows a party to a property tax appeal to challenge any aspect of an assessment, is not limited to appeals before the Magistrate Division. A county may contest the valuation of land in the consolidated property tax cases. As a result, the Tax Court’s decision was reversed. (Village At Main Street Phase II LLC v. Dept. of Rev., Or. S. Ct., TC 5054, 09/18/2014.)

Pennsylvania Special Local Taxes — Imposition of privilege tax on lessors.
The trial court erred in upholding the imposition of local business privilege tax (BPT) on lessors of real property, but did not err in finding that such lessors were required to register in order to rent or lease real property in the township. The Local Tax Enabling Act (LTEA) authorizes the imposition of business privilege tax, but 301.1(f)(1) of the Act (Pa. Stat. Ann. 53 § 6924.301.1(f)(1) ) specifically prohibits the assessment or collection of “any tax on . . . leases or lease transactions.” In Lynnebrook and Woodbrook Associates, L.P. ex rel. Lynnebrook Manor, Inc. v. Borough of Millersville , 963 A2d 1261 (Pa. 2008), the Pennsylvania Supreme Court held that the lease exclusion under the LTEA must be interpreted in a manner “that most restricts the taxing authority—that is, the broadest interpretation of the lease exception: an unqualified prohibition on the taxation of leases.” The township argued that the exclusion only applies to a direct tax on each lease transaction, wherein the township BPT applies to the gross receipts from the business of leasing property, however, a thorough reading of Lynnebrook shows that a 1.5 mill BPT tax on gross receipts from the lease or rental of real property still violates the limitation on the Township’s taxing authority when applied to a lessor’s lease revenue. The court noted that there is no material difference between a tax scheme that imposes a 1.5 mill tax upon the receipt of each rent payment (arguably a transactional tax), and a scheme that imposes a 1.5 mill tax payment annually based on all rent receipts (characterized by the Township as a business privilege tax). However, the court could not find that the taxpayers were exempt from the registration requirement as the leasing of real property is clearly a business, trade, occupation or profession under the registration provisions of the Municipal Code. (Fish, et al. v. Township of Lower Merion, Pa. Commw. Ct., Dkt. No. 1940 C.D. 2013, 09/19/2014.)

Texas Franchise Tax — Texas COGS deduction—indirect or administrative overhead costs.
The Texas Comptroller of Public Accounts has ruled that a nation-wide clothing and household goods retailer failed to show by clear and convincing evidence that indirect or administrative overhead costs should be included in the retailer’s cost of goods sold (COGS) deduction. In calculating taxable margin for the Texas franchise tax, the COGS deduction includes all direct costs of acquiring or producing goods, including certain labor costs. Labor costs that do not qualify can be included as indirect or administrative overhead costs that can be demonstrated as allocable to the acquisition or production of goods, except that the amount subtracted cannot exceed 4% of the total indirect or administrative overhead costs. In this case, the evidence is insufficient to support the inclusion of indirect or administrative overhead costs because: (1) the retailer’s proposed percentage of time that the stores’ sales associates and their supervisors spend performing tasks handling merchandise for stocking purposes are not supported by any surveys, statistical samples, or studies; (2) there are no accounting records that allow the retailer to identify the portion of the amounts of the sales floor payroll for each of the store’s sales departments; (3) although the job descriptions for the sales floor personnel include stocking tasks, no specific percentage of time is allocated to those tasks; (4) the percentages proposed by the retailer are based on an employee’s personal observations and experiences; and (5) the retailer failed to demonstrate that the costs at issue are allocable to the acquisition of its merchandise. ( Texas Comptroller.s Decision 109,185, 06/25/2014 .)

Vermont Real Property — Utility easements excluded from grand list.
The Vermont Supreme Court held that the state appraiser erred by including the value of certain easements in its valuation of the taxpayer’s property. The taxpayer, a utility company, has substations, transmission lines, a fiber-optic line, land, and utility easements located within the town. On appeal to the state appraiser, the taxpayer disagreed with the method of calculating depreciation of the electrical equipment, and whether to apply depreciation in the first year, and whether the valuation should have included the value of utility easements and rights of way held by taxpayer. The state appraiser agreed with the town that an appraisal based on straight line depreciation was the most accurate method, but did not address whether easements could not be taxed and that depreciation should have been taken for the first year of service. On appeal to the state Supreme Court, the taxpayer raised four issues: (1) it argued that the state appraiser should have used an alternative method that was previously approved by the Court; (2) the appraiser’s decision on fair market value was not supported by the evidence; (3) the state appraiser failed to explain its decisions not to depreciate assets during their first year of service; and (4) the taxpayer challenged the appraiser’s decision to include an appraised value for the utility easements. The state Supreme Court held that: (1) the taxpayer had not argued that the state appraiser was barred by principles of issue preclusion from using another method, and thus failed to preserve it on appeal; (2) it remanded for further findings on life spans to be used for calculating depreciation; (3) the Court also remanded for further findings because the appraiser did not specifically address the issue of the first year of service; and (4) that because statutory provisions make no distinction between great and small easements, or between those used for the transmission of electricity and those which provide access or convey well rights, it would follow precedent and continue to exclude easements from the grand list. Thus the Court found that the state appraiser erred by including the value of the easements in its valuation and reversed and remanded. (Vermont Transco LLC v. Town of Vernon, Vt. S. Ct., Dkt. No. 2013-243, 09/19/2014.)

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