Keep up with the latest state and local tax developments by reading our SALT Alerts. They are labeled by state so that you can easily find the ones that apply to you. The following are the most recent alerts:
While 2016 saw its fair share of important SALT developments, this year may best be remembered as a time in which many fundamental issues were set up for dynamic resolution in the coming year. For example, on the remote seller nexus front, while federal legislation on the subject failed to advance this year, many states took matters into their own hands by enacting legislation and inviting litigation at the state level to address how to require remote sellers to collect and remit sales and use tax. Courts and legislatures addressed the ability of states to subject businesses with a lack of physical presence to entity-level taxes imposed by Ohio and Nevada. - See more at: https://www.grantthornton.com/issues/library/alerts/tax/2016/SALT/General/Top-stories-of-2016-12-20.aspx#sthash.W2kJF243.dpuf
SALT top stories of 2016
While 2016 saw its fair share of important SALT developments, this year may best be remembered as a time in which many fundamental issues were set up for dynamic resolution in the coming year. For example, on the remote seller nexus front, while federal legislation on the subject failed to advance this year, many states took matters into their own hands by enacting legislation and inviting litigation at the state level to address how to require remote sellers to collect and remit sales and use tax. Courts and legislatures addressed the ability of states to subject businesses with a lack of physical presence to entity-level taxes imposed by Ohio and Nevada.
California clarifies valuation and appeal of construction in progress
On Feb. 25, 2016, the California Court of Appeal held that for property tax purposes a new base year is established every lien date (Jan. 1) for construction in progress, until such construction is complete. On Oct. 26, 2016, the California State Board of Equalization issued a memorandum to county assessors announcing that this decision supersedes guidance provided in California’s Assessors’ Handbook, which states that partially completed new construction does not acquire a base year value. The decision and memorandum also clarify the deadline for appealing a valuation of construction in progress.
California court grants FTB’s motion for summary judgment in Harley-Davidson case
On remand from the California Court of Appeal, a San Diego trial court granted a California Franchise Tax Board (FTB) motion for summary judgment on the issue of whether a California statute discriminates against multistate taxpayers under the Commerce Clause by providing only intrastate unitary businesses with an election to compute their tax on a separate accounting method or combined reporting method. The trial court ruled that although the statute may be discriminatory, the statute is permissible because the state has a legitimate interest in ensuring the accurate accounting of business income from interstate activities.
Mississippi Supreme Court holds dividends received exclusion statute violates dormant commerce clause
On Oct. 27, 2016, the Mississippi Supreme Court held that the portion of the state’s corporate income tax dividends received exclusion statute that imposes a geographical limitation on the ability to qualify for the exclusion violates the dormant Commerce Clause of the U.S. Constitution. Under the geographical limitation, the Court held that the exclusion is impermissibly limited to dividends received from affiliates that do business in Mississippi and file income tax returns in the state. The Court remedied the defect in the statute by severing the unconstitutional portion of the statute, thereby allowing the exemption to taxpayers who already have borne a tax in Mississippi or another state.
Nebraska Supreme Court upholds taxpayers’ special capital gains election, finds economic substance doctrine inapplicable
On October 14, 2016, the Nebraska Supreme Court held that the taxpayers qualified for the state’s special capital gains election because they met the literal terms of the statutes providing for the election.(1) The decision is notable for the Court’s refusal to apply either the “economic substance” doctrine or the “sham transaction” doctrine as a basis to disallow the taxpayers’ election, notwithstanding the fact that the taxpayers had entered into a presale restructuring transaction solely for the purpose of qualifying for the election. Instead, the Court focused its analysis on a strict application of the principles of statutory interpretation.
Ohio Supreme Court holds CAT’s bright-line presence nexus standard satisfies Commerce Clause
On Nov. 17, 2016, the Ohio Supreme Court held that the bright-line presence nexus standard that applies to the commercial activity tax (CAT) satisfies the substantial nexus requirement under the Commerce Clause of the U.S. Constitution. The business challenging the imposition of the CAT, an out-of-state retailer that did not have a physical presence in the state, had nexus with Ohio because its annual gross receipts in Ohio exceeded the $500,000 statutory threshold.
City of Philadelphia enacts new economic incentive reporting requirement
The city of Philadelphia recently enacted new economic reporting requirements for businesses receiving credits for new job creation that may be taken against the Philadelphia Business Income and Receipts Tax. Businesses meeting the requirements must file a report, by May 1 of each year, containing the incentives received, the number of employees and the number of jobs created in the previous year. Failure to comply with the new annual reporting requirement will result in penalties including fines and possible suspension or revocation of the business’s commercial activity license.
South Carolina Court of Appeals holds department failed to prove statutory apportionment method was distortive
The South Carolina Court of Appeals determined that a taxpayer could utilize the state’s standard three-factor apportionment formula, and rejected a challenge by the South Carolina Department of Revenue to require alternative apportionment based on the argument that the statutory method used by the taxpayer was distortive.
Utah District Court clarifies scope of discretionary authority provision as applied to transfer pricing issues
On Oct. 6, 2016, the Fourth Judicial District Court in Utah County upheld 90% of the deductions for royalty payments made by a taxpayer to a related party for the use of intellectual property. In doing so, the district court rejected an argument by the Utah Tax Commission (UTC) that Utah Code Ann. Sec. 59-7-113 gave it unfettered authority to reallocate income upon a finding of distortion of income for tax purposes. Instead, the court found that the UTC’s discretion is limited by language outside the statute, specifically the regulations promulgated under Internal Revenue Code Sec. 482.