Southeast State & Local Tax: Important Developments - February 2014

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Explore:  Sales & Use Tax SALT

The Williams Mullen Southeast State and Local Tax (SESALT) team is pleased to provide you with a comprehensive recap of recent legislation around the U.S.

VIRGINIA

SALES AND USE TAX

  • Children’s Party Packages Subject to Tax. The Department of Taxation held that, in instances where food is provided in connection with admissions, the entire charge is subject to sales and use tax.  The taxpayer charged a single price for party packages, which included access to the amusement center, food and beverages.  Pursuant to Va. Admin. Code § 10-210-30, cover charges that include the provision of food or drink constitute a sale of property and are subject to tax.  The ruling rescinds Va. P.D. 11-24, which held that such packages were an exempt service because the true object of such children’s packages is the party experience, not tangible personal property.  Va. P.D. 14-1.

  • Taxpayer Failed to Qualify for Advertising Exception for Lack of Documentation. The Department of Taxation held that the taxpayer, a graphic design business, did not qualify for the professional advertising services exception to the sales and use tax under Va. Admin. Code § 10-240-41(A).  The taxpayer was unable to provide documentation that it was acting in the capacity of an advertiser in the contested transaction, due to incomplete descriptions provided on its invoices and a computer hard drive crash that destroyed other business records.  Va. P.D. 14-4.

  • Telephone Calling Cards Subject to Tax. The Department of Taxation held that sales of pre-paid telephone calling cards are subject to sales tax, pursuant to Va. Code § 58.1-602, which became effective on July 1, 2004.  Prior to this date, telephone calling cards were exempt from sales tax.  The Taxpayer was unaware of the change in law and sought a waiver of the Department's assessment.  The Department held that the publication of the rule change was sufficient for the taxpayer to know that the cards were taxable.  This ruling supports the premise that a business owner is deemed to know about its business and does not get an engraved announcement when the law changes.  Va. P.D. 14-10.

  • Electronic Document Services and Programming Services Exempt From Tax. The Department of Taxation held that electronic document services and software programming services provided by the taxpayer were exempt from sales tax under Va. Code §§ 58.1-609.5(1) and 58.1-609.5(6).  Although billed on the same invoice, the charges for the electric document services were stated separately and independently from, and were not integral to, sales of printed materials.  The programming services offered were customized and unique to each customer’s specifications.  Furthermore, as there was no transfer of the software programming to the customer in tangible form, the charges were exempt from sales tax. Va. P.D. 14-14.

  • Contractor Subject to Tax as Ultimate Consumer. The Department of Taxation held that the taxpayer, a systems integrator that developed and implemented systems solutions for agencies of the federal government, was liable for sales tax on purchases of tangible personal property used in the provision of support services to those government agencies.  Pursuant to Title 23 Va. Code § 10-210-693, as it existed on the effective date of the contracts at issue, the contractor is deemed the taxable user and consumer of tangible personal property used in performing under a service contract, regardless of subsequent sale to the government. Va. P.D. 14-15.
     

MACHINERY AND TOOLS TAX

  • Qualification for the Idle Machinery Exception. The Department of Taxation confirmed that a taxpayer may qualify for the idle machinery exception to the machinery and tools tax (“MTT”) by satisfying either the one-year test or the notification test.  Under the one-year test, the use of the machinery must be discontinued for at least one year.  Under the notification test, the taxpayer must notify the local commissioner in writing by April 1 that it will remove the item from service no later than the next tax day.  To qualify under either test, the machinery must not be in use on the tax day, and there can be no reasonable prospect that the machinery will be returned to use during the tax year.  Va. P.D. 14-12.

  • Pollution Control Equipment and the Manufacturing Process.  For tax years prior to January 1, 2011, pollution control equipment (“PCE”) was only exempt from the machinery and tools tax (“MTT”) to the extent provided by local ordinance.  In P.D. 14-12, however, the Department of Taxation recognized that, even if the locality did not provide an exemption, PCE is not subject to the MTT unless it constitutes machinery and tools.  As the terms “machinery and tools” and “manufacturing process” are not defined by the Code of Virginia for purposes of the MTT, the Department has relied on the definitions provided by the Supreme Court of Virginia in its decisions.  The ruling provides that certain PCE used by the taxpayer is not machinery and tools unless the waste products are reused in the manufacturing process.  Va. P.D. 14-12.
     

TAX CREDITS

  • Taxpayer Reevaluation of Land Preservation Tax Credit. The Department of Taxation rejected a taxpayer’s appraisal of a conservation easement and held that the individuals who purchased the credit from the taxpayers were liable for additional taxes. The taxpayers were awarded a credit by the Department based on a third-party appraisal of the easement at approximately $4.4 million. The taxpayers subsequently transferred the credit to unrelated individuals.  Under examination, the Department commissioned a third-party appraisal that valued the easement at $500,000. The Department concluded that its third-party appraisal more accurately reflected the value of the easement.  Based on this appraisal, the credit was revalued, and assessments were issued against the individuals who received the credit.  Va. P.D. 14-7.
     

CORPORATE INCOME TAX

  • Foreign-Source Income Subtraction.  The Department of Taxation held that consideration received by the taxpayer for its computer software and as “technical fees” qualified for the Foreign Source Income (“FSI”) subtraction.  The taxpayer developed computer software solutions for foreign clients and charged technical fees to implement the software.  In order to qualify for the FSI subtraction in Virginia, the technical fees must be incidental to a contract relating to the rental of real property or the licensing of a patent or other like property outside the U.S.  The Department ruled that, because software is an intangible, both the software and the technical fees charged in connection with the software qualified for the FSI subtraction.  Va. P.D. 14-8.
     

NORTH CAROLINA

  • Trust Tax Recovery Program.  The Department of Revenue recently introduced the Trust Tax Recovery Program to help businesses recover from certain tax liability issues.  The program will offer penalty and fee waivers in addition to payment plans to companies that have fallen behind on sales, withholding and other trust taxes.  Businesses that file and pay all outstanding taxes in accordance with the payment plan may have their penalties and collection fees waived.  Fees and penalties may be reinstated upon subsequent failure to file or pay future taxes. N.C. Dept. of Rev., Trust Tax Recovery Program (Feb. 5, 2014)

  • Service Contracts for Motor Vehicles Subject to Highway Use Tax.  The Department of Revenue issued guidance on the collection of sales tax on service contracts for motor vehicles subject to the highway use tax.  Service contracts sourced to North Carolina and sold at retail to maintain or repair a motor vehicle are subject to the 4.75% general state and applicable local and transit rates of sales tax.  In addition, a 3% highway use tax is imposed on the retail value of a motor vehicle for which a certificate of title is issued.  The tax is payable at the time of application for a certificate of title, but a retailer may elect to defer payment subject to certain deferral terms. N.C. Dept. of Rev., Sales and Use Tax on Service Contracts for Motor Vehicles (Feb. 7, 2014).

  • Bonus Asset Basis. The North Carolina Department of Revenue issued guidance regarding the bonus asset basis.  Generally, the five-year bonus depreciation deduction allowed on North Carolina individual, C corporation, or pass-through income tax returns in cases where a taxpayer reported an addition for bonus depreciation in an earlier year is not affected by the sale, transfer, or other disposition of the asset for which the bonus depreciation was claimed.  However, legislation enacted effective for tax years beginning on or after January 1, 2013 causes a different result if an asset is transferred and the tax basis of the asset carries over from the transferor to the transferee for federal income tax purposes.  In such transfers, the transferee must add any remaining installments of the five-year bonus depreciation deduction to the basis of the transferred asset (“basis adjustment”) and depreciate the adjusted basis over any remaining life of the asset. N.C. Dept. of Rev., Bonus Asset Basis (Feb. 24, 2014).
     

MARYLAND

  • Health Enterprise Zone Hiring Tax Credit.  The Maryland Comptroller's Office issued new guidance on the Health Enterprise Zone Hiring Tax Credit.  A Health Enterprise Zone Practitioner may be eligible for tax credits based on the number of qualified employees certified by the Maryland Department of Health and Mental Hygiene multiplied by $5,000.  The credit is available only with an electronically filed return and may be taken by sole proprietorships, corporations and pass-through entities. Md. Comptroller’s Office, Health Enterprise Zone Hiring Tax Credit (Feb. 1, 2014)

  • Unclaimed Property. The Maryland Court of Special of Appeals held that the Comptroller of the Treasury for Maryland was required to disclose the names and addresses relating to unclaimed property tax accounts to the petitioner.  The petitioner requested the disclosure of the 5,000 most valuable unclaimed property accounts, sorted by value, without revealing the amounts of each account.  The Comptroller argued that disclosure was not required under Maryland’s Public Information Act because it would require the creation of a new record.  The court disagreed, finding that the Comptroller already maintained such records under Maryland’s Abandoned Property Act.  However, the court rejected the petitioner’s request for a list sorted by value because it would reveal financial information beyond the requirements of the Abandoned Property Act. Comptroller v. Immanuel, Md.  Court Spec. App., 2014 BL 29201 (Jan. 29, 2104).
     

AROUND THE NATION

  • Illinois – Nexus Guidelines. The Illinois Department of Revenue issued basic guidelines to determine whether nexus exists for purposes of the retail occupation tax or use tax.  The guidelines focus on the definition of an Illinois retailer as one who accepts purchase orders, maintains inventory, or maintains a place of business in Illinois.  The Department notes that physical presence under Illinois law includes the presence of seller representatives and agents, not just sales representatives. Il Dept. of Rev., ST 13-0069-GIL.

  • Michigan – Corporate Officer Liability. The U.S. Court of Appeals for the 6th Circuit held that an assessment against an individual for a company’s unpaid Single Business Tax stemming from the individual’s status as a responsible officer was not dischargeable in bankruptcy.  Although the individual had received a general discharge under Chapter 7 of the Bankruptcy Code, the bankruptcy law does not preclude a state from seeking post-discharge payment on excise tax deficiencies from parties not initially subject to the excise.  Rizzo v. Michigan, U.S. Ct App., 6th Cir., No. 13-1230 (Feb. 4, 2014).

  • Michigan – Successor Liability.  Michigan amended the provisions concerning the tax liabilities of a purchaser of a business.  Among other changes, the amendments require the Department of Treasury to release to a purchaser a business’s known or estimated tax liability within sixty (60) days of receipt of the request.  The amendments also define a “responsible person” as an officer, member, manager of a manager-managed limited liability company, or partner for the business (i) who controlled, supervised, or was responsible for the filing of returns or payment of any tax during the time period of default, and (ii) who willfully failed to file a return or pay the tax due. Mich. Leg. L. 2014, S337 (Effective Feb. 6, 2014).
     

CIRCULAR 230:  Treasury regulations require us to inform you that neither you nor any other recipient may use any tax advice in this communication for the purpose of avoiding penalties under the Internal Revenue Code.  Treasury regulations require attorneys and other tax advisors, who provide tax advice for such purpose, to perform increased due diligence to verify all relevant facts, provide a conclusion with respect to each tax issue and format the tax advice consistent with strict and detailed requirements.  If you would like us to prepare written tax advice consistent with these requirements, please contact us, and we will be pleased to discuss the matter with you in more detail.

Topics:  Sales & Use Tax, SALT

Published In: General Business Updates, Health Updates, Tax Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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