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

State & Local Tax Updates: Arkansas Sales & Use Tax; Kentucky Open Records Act; and Missouri Real Property 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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Arkansas Sales And Use Tax — Designation of local sales/use tax.
A city council lacks the power to unilaterally restrict the use of revenues from local sales tax beyond its appropriations for the current fiscal year; therefore a resolution adopted prior to the adoption of a general sales tax purporting to affix the manner of future appropriation of the tax is not binding on subsequent city councils. Similarly, a resolution adopted by a county quorum court prior to the adoption of a countywide general sales tax purporting to affix the manner of future expenditure of the tax is not binding on future quorum courts. The law contemplates that cities operate on annual budgets, which function as an appropriation of city funds that the council may change from time to time. Voters may designate (and thereby restrict) the use of undesignated general municipal sales tax revenues, however, the city council lacks the power to unilaterally restrict the use of such revenues beyond its appropriations for the current fiscal year. The same is true with respect to annual appropriations made to counties by the quorum court. A resolution adopted by a city or a county also does not constitute a binding agreement or interlocal agreement for funding the operations of the district court for a period exceeding one year or past the current fiscal or calendar year. In the absence of a valid and binding agreement between a city and a county over such funding, the county will pay half the salary of a local district court judge and chief clerk, subject to various exceptions that may affect a county’s responsibility. (Attorney General Opinion, 2014-077 , 10/09/2014.)

California Real Property — SBE property tax information directory updated.
The California State Board of Equalization (SBE) has updated its Property Tax Information Directory, which is a list of key personnel that should be of assistance to those in the property tax area. The SBE notes that there have been a number of recent changes to staff assignments in the County-Assessed Properties Division. ( California State Board of Equalization Letter to Assessors 2014/052, 10/09/2014 .)

Kentucky General Administrative Provisions — Open Records Act.
The Franklin Circuit Court ruled that the Kentucky Department of Revenue (DOR) violated the Open Records Act by failing to confirm or deny that court filings and pleadings contained in DOR’s internal case file relating to a tax case exist, and, if they exist, by failing to make the requested documents available for inspection or otherwise articulating a legally recognized exemption to disallow inspection. The Court found that the work product doctrine does not prevent public documents and records, which have already been voluntarily disclosed upon filing in the open court record, from being inspected. The Court noted that public inspection of attorney case files must necessarily be narrowly tailored so that only public documents are made available. If DOR’s entire case file had been requested, a limited denial of inspection would be appropriate for documents not filed in the public record. However, the documents requested were final documents voluntarily placed in the open public record and, therefore, were not privileged. (Kentucky Department of Revenue v. Sommer, Franklin Cir. Ct. 12-CI-01582, 10/08/2014.)

Kentucky Real Property — Charitable status denied.
The Kentucky Board of Tax Appeals (BTA) ruled that a Lions Club did not qualify as a purely public charity, since the dispensing of charity was an incidental part of its activities. Consequently, the club’s property was taxable and was assessed at $688,000 for the 2013 tax year. The club owns a large multipurpose hall where its members participate in monthly meetings, an annual Super Bowl party, and family parties and family/membership gatherings on Sundays, for a minimal cleaning fee. Members and their families have the opportunity to rent out the large banquet-type facility and use the kitchen for a discounted fee. The BTA determined that any charity dispensed at the building itself is merely incidental to the primary use of the building as a gathering place for the club members and their families. While the club raises significant funds in any given year through its Super Bowl party; the rental of its building; and, its beer and wine sales, most of this money goes back into the upkeep of its building. The amount of donations to charity was not significant in proportion to the amount of receipts generated. (Pleasure Valley Lions Club, Inc. v. Jefferson Cty Property Valuation Administrator, KY. BTA, File No. K13-S-125, 10/09/2014.)

Kentucky Sales And Use Tax — Locomotive supplies.
The Kentucky Board of Tax Appeals (BTA) ruled that track and signal items used by a railroad were not supplies used for the direct operation of a locomotive or train and, therefore, were not exempt from sales and use tax under Ky. Rev. Stat. Ann. § 139.480(1) . The taxpayer failed to prove that these items fell within the category of supplies. The direct testimony presented by each of the taxpayer’s witnesses supports a finding that the items were either repair parts, when a part had to be replaced that was defective or damaged, or replacement parts used in a capital improvement program. The BTA found that the term “supplies” excludes items that are not consumed in work, but are merely worn out or broken. None of the items in the audit or refund claim, with the exception of weed chemicals, constituted a “supply” within the plain meaning of the statute. The weed chemicals, while constituting supplies, did not qualify for the exemption because the legislature only exempted supplies for the direct operation of the locomotive or train. The BTA found that the plain meaning of the words “direct operation” means that the supplies have to actually be used on or in the locomotive or train itself, so that the locomotive and train will function and be operable. The weed chemicals are not used on or in the locomotives or trains, but are sprayed on and near the track and in the surrounding brush and are not, therefore, “for the direct operation of the locomotive and trains.” (CSX Corp., Inc. v. Kentucky Dept. of Revenue, KY. BTA, File No. K12-R-33, 10/09/2014.)

Missouri Real Property — Personal property assessment.
The Missouri State Tax Commission held that the taxpayer sufficiently rebutted the presumption in favor of the assessment made by the assessor and affirmed by the Lawrence County Board of Equalization. The machinery and equipment consisted of a variety of machinery, tools, and appliances used by the taxpayer in its facility. The taxpayer’s appraiser developed a value under the methodology presumed to be correct under Mo. Rev. Stat. § 137.122 , which sets forth the class life and depreciation table for calculation of true value. The appraiser valued the items of property based on the concept of fair market value in exchange, which is the appropriate concept of value to be applied, and performed an appraisal using the sales comparison approach and the cost approach. Hence, the assessed valuation for the subject property as determined by the Lawrence County Board of Equalization was set aside. (Silgan Container Manufacturing v. Bowerman, Assessor of Lawrence County, Mo. State Tax Commission, Dkt. No. 12-65000, 10/09/2014.)

Nebraska Sales And Use Tax — 3-day mailing rule extension does not apply to deficiency notices.
The Nebraska Court of Appeals upheld a Lancaster County District Court decision which found that the taxpayer’s petition for redetermination was not timely filed with the Nebraska Department of Revenue. On April 16, 2012, the Department issued a Notice of Deficiency Determination claiming Nebraska sales and use taxes and waste reduction and recycling fees were owed by the taxpayer. The Notice of Deficiency was sent to the taxpayer by certified mail on April 16 and was received by the taxpayer on April 17. The taxpayer mailed its Petition for Redetermination to the Department on June 18, which was received by the Department on June 19. On July 2, the Department issued its Final Determination denying the taxpayer’s appeal on the sole ground that the taxpayer had failed to file its appeal within 60 days of April 16, as required by Neb. Rev. Stat. § 77-2709 . The taxpayer argued that the 3-day mailing rule set for in Neb. Ct. R. Pldg. §6-1106(e) applied to extend the 60-day period to file its Petition for Redetermination with the Department by 3 additional days to June 18, thus making its Petition for Redetermination timely. However, the Court of Appeals ruled that the 3-day mailing rule did not apply to Deficiency Notices mailed by the Department and therefore the taxpayer’s Petition for Redetermination was not timely filed. (Lyman-Richey Corporation v. Nebraska Department of Revenue, Neb. Ct. App.,Dkt. No. A-13-269, 10/07/2014.)

New Mexico Personal Income Tax — Warrant of levy on joint bank accounts.
The New Mexico Taxation and Revenue Department properly prepared and served a warrant of levy on a bank that had accounts with a delinquent deceased taxpayer’s name on them, and lawfully collected the tax amounts due from those accounts, even though the accounts were opened by the taxpayer’s sister and the sister was the only individual to actually deposit any money into the accounts. Unaware that the taxpayer had an outstanding New Mexico tax liability, a few years prior to his death the sister had put the taxpayer’s name on her own accounts as a joint owner so as to charitably assist the taxpayer financially. After the delinquent taxpayer died, the sister failed to inform the bank of his death and so, prior to the Department’s levy, she did not remove the taxpayer’s name from the accounts. By not notifying the bank of the taxpayer’s death, or otherwise removing his name from the nominal joint accounts, the sister did not terminate the delinquent taxpayer’s right to the funds, regardless of his death or the actual ownership of the funds. The Department acted in accordance with the applicable law when it levied the funds. Accordingly, the sister’s protest of the warrant and collection was denied. ()

Ohio Commercial Activity Tax — Petroleum activity tax filing deadline.
The Ohio Department of Taxation reminds taxpayers that the third quarter 2014 petroleum activity tax (PAT) return is due November 10, 2014. Taxpayers are required to file and pay the PAT electronically via the Ohio Business Gateway at business.ohio.gov. (Petroleum Activity Tax Filing Deadline, OH Dept. Tax., 10/10/2014.)

Ohio Real Property — Homestead exemption denied—lack of jurisdiction.
The Ohio court of Appeals affirmed the decision of the Board of Tax Appeals (BTA) that dismissed the taxpayer’s complaint for lack of jurisdiction. The taxpayers had requested a homestead exemption on a parcel of land they purchased in May 2007; the parcel had been subdivided in February from a larger parcel owned by the condominium developer. The request for homestead exemption was denied since the parcel did not exist on the tax list or on the tax lien date of January 1, 2007. Although the taxpayers contended that the status of property as of the tax lien date was irrelevant, and that a new tax lien date was imposed on the date the parcel was subdivided, the court found that Ohio statutes require that the taxpayers occupy the property as their principal place of residence as of January 1. Further, there was no statutory or other support given for the contention that a new tax lien date was imposed on the date the parcel was subdivided. As the parcel did not exist as of the January 1, 2007 tax lien date, the BTA lacked jurisdiction to consider the merits of the complaint. (Dugan v. Franklin Cty. Bd. of Revision, Ohio Ct. App., Dkt. No. 14AP-351, 10/09/2014.)

Oklahoma Sales And Use Tax — Voluntary disclosure guide.
The Compliance Division of the Oklahoma Tax Commission recently published a guide addressing the state’s “voluntary disclosure” agreement program, which is applicable to all tax types currently administered by the Commission and primarily designed to promote compliance with the state’s tax laws and also to provide a benefit to a domestic or foreign taxpayer that has discovered a past filing obligation and/or payment liability to Oklahoma that has not been discharged. “Voluntary disclosure” generally arises when a taxpayer or a representative contacts the Commission prior to any initial contact by the Commission, the federal Internal Revenue Service, or an agent of these tax authorities concerning the filing of a return and/or the payment of a tax liability. A major component of the program is to help resolve sales and use, withholding, and corporate income and franchise tax liabilities when nexus is the central issue. Among other relevant topics, the program guide briefly explains the following: how to qualify for the program; the benefits of a voluntary disclosure, such as a limited look-back period and consideration for a specified interest and/or penalty waiver; how to apply, even anonymously, to the program using Form 892; the Commission’s application review and approval process; the Commission’s right to audit certain taxpayer documents for the designated voluntary disclosure period; and the taxpayer’s right to confidentiality throughout the whole process. (Voluntary Disclosure Agreement Guide, Oklahoma Tax Commission – Sales and Use Division, 10/08/2014.)

Oregon Personal Income Tax — Working family and child care tax credit.
The Oregon Tax Court determined that the taxpayer’s rights to appeal expired before she filed a written objection because it was not filed within 30 days of the date of the Notice of Proposed Adjustment for the 2011 tax year and that the taxpayer met her burden of proof regarding the Notice of Proposed Adjustment for the 2012 tax year for the working family and child care credit due to conclusive evidence. Child care payments must be made by the parent claiming the working family child care credit. When a taxpayer decides to pay cash for child care expenses, then the taxpayer has the burden of providing sufficient evidence to substantiate the total amount of the claimed expense. Contemporaneous receipts that are properly completed, including the date, name of the person who paid the cash, amount paid, and the signature of the child care provider are essential. Since the taxpayer provided copies of receipts, witness testimony, child care provider forms and a payment record, the court concluded that the taxpayer paid in cash $7,730 for child care expenses, which would be allowed as a credit for the tax year 2012, but the balance of the taxpayer’s claimed child care expenses for tax year 2011 would be disallowed due to the failure of the taxpayer to file a timely appeal. (Sara Diane Horn v. Dept. Rev., Or. Tax Ct., Magis. Div., No. TC-MD 130451D, 10/09/2014.)

Tennessee Corporate Income Tax — Application of Tennessee’s definition of captive and public REITS.
The Tennessee Department of Revenue has issued a revenue ruling that discusses how Tennessee applies the definition of public real estate investment trusts (REITs) and captive REITs for franchise and excise tax purposes and how being classified as a public REIT or a captive REIT impacts franchise and excise tax liability. The ruling states that in order for a REIT to be classified as a public REIT, its shares must be traded on a national exchange registered with the SEC or a regulated national securities exchange of a foreign country. A REIT that has public investors but is not traded on a national exchange does not qualify as a public REIT. The fact that a REIT has a public REIT as a parent does not qualify it as a public REIT but may qualify it for tax breaks available to a public REIT. ( Tennessee Revenue Ruling 14-07, 08/25/2014 .)

Tennessee Corporate Income Tax — Tennessee Industrial Machinery Credit not available from IRC 338(h)(10) election.
The Tennessee Department of Revenue has ruled that a taxpayer may not claim the Tennessee franchise and excise tax industrial machinery credit with respect to assets that it was deemed to acquire as a result of an IRC 338(h)(10) election. The Tennessee franchise and excise tax laws neither adopt nor disallow the provisions of IRC 338(h)(10) and accompanying federal regulations, nor do they provide for a comparable election to treat a stock sale as a deemed asset sale. Accordingly, transactions deemed to have occurred for federal income tax purposes per Treas. Reg. § 1.338(h)(10)-1 are not deemed to have occurred for Tennessee franchise and excise tax purposes. Rather, the owners of the taxpayer sold their stock in the taxpayer, and the buyer and the seller made a federal election to treat the stock sale as an asset sale for federal income tax purposes. Accordingly, the sale did not involve the purchase by the taxpayer of the manufacturing assets for purposes of qualifying for the industrial machinery credit. ( Tennessee Letter Ruling 14-06, 08/25/2014 (released 10/06/2014).)

Tennessee Credits and Incentives — Industrial Machinery Credit not available from IRC 338(h)(10) election.
The Tennessee Department of Revenue has ruled that a taxpayer may not claim the Tennessee franchise and excise tax industrial machinery credit with respect to assets that it was deemed to acquire as a result of an IRC 338(h)(10) election. The Tennessee franchise and excise tax laws neither adopt nor disallow the provisions of IRC 338(h)(10) and accompanying federal regulations, nor do they provide for a comparable election to treat a stock sale as a deemed asset sale. Accordingly, transactions deemed to have occurred for federal income tax purposes per Treas. Reg. § 1.338(h)(10)-1 are not deemed to have occurred for Tennessee franchise and excise tax purposes. Rather, the owners of the taxpayer sold their stock in the taxpayer, and the buyer and the seller made a federal election to treat the stock sale as an asset sale for federal income tax purposes. Accordingly, the sale did not involve the purchase by the taxpayer of the manufacturing assets for purposes of qualifying for the industrial machinery credit. ( Tennessee Letter Ruling 14-06, 08/25/2014 (released 10/06/2014).)

Tennessee Franchise Tax — Application of definition of captive and public REITS.
The Tennessee Department of Revenue has issued a revenue ruling that discusses how Tennessee applies the definition of public real estate investment trusts (REITs) and captive REITs for franchise and excise tax purposes and how being classified as a public REIT or a captive REIT impacts franchise and excise tax liability. The revenue ruling provides examples to illustrate how the rules are applied.The ruling states that in order for a REIT to be classified as a public REIT, its shares must be traded on a national exchange registered with the SEC or a regulated national securities exchange of a foreign country. A REIT that has public investors but is not traded on a national exchange does not qualify as a public REIT. The fact that a REIT has a public REIT as a parent does not qualify it as a public REIT but may qualify it for tax breaks available to a public REIT. ( Tennessee Revenue Ruling 14-07, 08/25/2014 (released 10/06/2014))

Tennessee Franchise Tax — Industrial Machinery Credit not available from IRC 338(h)(10) election.
The Tennessee Department of Revenue has ruled that a taxpayer may not claim the Tennessee franchise and excise tax industrial machinery credit with respect to assets that it was deemed to acquire as a result of an IRC 338(h)(10) election. The Tennessee franchise and excise tax laws neither adopt nor disallow the provisions of IRC 338(h)(10) and accompanying federal regulations, nor do they provide for a comparable election to treat a stock sale as a deemed asset sale. Accordingly, transactions deemed to have occurred for federal income tax purposes per Treas. Reg. § 1.338(h)(10)-1 are not deemed to have occurred for Tennessee franchise and excise tax purposes. Rather, the owners of the taxpayer sold their stock in the taxpayer, and the buyer and the seller made a federal election to treat the stock sale as an asset sale for federal income tax purposes. Accordingly, the sale did not involve the purchase by the taxpayer of the manufacturing assets for purposes of qualifying for the industrial machinery credit. ( Tennessee Letter Ruling 14-06, 08/25/2014 (released 10/06/2014).)

Tennessee Sales And Use Tax — Cloud collaboration services are taxable in Tennessee.
The Tennessee Department of Revenue (Department) has ruled that cloud collaboration services are taxable in Tennessee. The taxpayer’s cloud collaboration service serves as an alternative to its customers that provides cloud-based applications and related services to supplement and support a customer’s telecommunication equipment. The service augments a customer’s voice, video, messaging, presence, audio/web conferencing, and mobile capabilities. The cloud collaboration service therefore eliminates the need for a customer to maintain software and hardware necessary to process and route calls. The Department ruled that this service constitutes the sale of intrastate telecommunications and ancillary services and that sales are sourced to Tennessee if the customer primarily uses the service at a street address in Tennessee. The taxpayer is considered the user and consumer of the hardware and software that it purchases in providing its service, and, thus, it does not resell such hardware and software to its customers. ( Tennessee Letter Ruling 14-05, 08/25/2014 (released 10/06/2014).)

Tennessee Sales And Use Tax — Taxability of edible and non-edible products sold in Tennessee.
The Tennessee Department of Revenue (Department) has issued a revenue ruling that discusses the taxability of various edible and non-edible products. The Department states that non-alcoholic cocktail mixes, non-alcoholic beer, trail mixes, fiber drink mix, food thickener, oral electrolyte replacement solutions and distilled water with electrolytes are considered food and food ingredients and subject to the sales and use tax at the state rate of 5% and local option tax. Glucose tablets are not considered food or food ingredients and are subject to state tax at the rate of 7% plus local option tax. Coupon books are not subject to the Tennessee sales and use tax because the true object of the transaction is to acquire the right to a discount. Hearing aid batteries are exempt from sales and use tax because they are considered prosthetic devices. The sale of propane, regardless of whether there is an exchange of an empty tax is subject to the state sales and use tax but is exempt from local option tax. ( Tennessee Revenue Ruling 14-08, 08/28/2014 (released 10/06/2014).)

Texas Business Tax Rates — 2015 temporary permissive alternate franchise tax rates.
The Texas Comptroller of Public Accounts has estimated that the probable revenue for the state fiscal biennium ending August 31, 2015, will exceed probable revenue as stated in the comptroller’s Biennial Revenue Estimate for the 2014-2015 fiscal biennium by an amount sufficient to offset the loss in probable revenue that will result if taxable entities make the election to compute the franchise tax at the temporary permissive alternate rates for 2015. Therefore, a taxable entity can elect to pay the tax at a rate of 0.95% (normally, 1%) of taxable margin, and a taxable entity primarily engaged in retail or wholesale trade can elect to pay the tax at a rate of 0.475% (normally, 0.5%) of taxable margin for reports originally due on or after January 1, 2015, and before January 1, 2016. (Certification of Probable Revenue for State Fiscal Biennium Ending August 31, 2015, Texas Comptroller of Public Accounts, Texas Register Vol. 39, No. 40, 10/03/2014, p. 7970.)

Texas Franchise Tax — 2015 temporary permissive alternate Texas franchise tax rates.
The Texas Comptroller of Public Accounts has estimated that the probable revenue for the state fiscal biennium ending August 31, 2015, will exceed probable revenue as stated in the comptroller’s Biennial Revenue Estimate for the 2014-2015 fiscal biennium by an amount sufficient to offset the loss in probable revenue that will result if taxable entities make the election to compute the franchise tax at the temporary permissive alternate rates for 2015. Therefore, a taxable entity can elect to pay the tax at a rate of 0.95% (normally, 1%) of taxable margin, and a taxable entity primarily engaged in retail or wholesale trade can elect to pay the tax at a rate of 0.475% (normally, 0.5%) of taxable margin for reports originally due on or after January 1, 2015, and before January 1, 2016. (Certification of Probable Revenue for State Fiscal Biennium Ending August 31, 2015, Texas Comptroller of Public Accounts, Texas Register Vol. 39, No. 40, 10/03/2014, p. 7970.)

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