CPAs need to be aware of current developments in key states in order to properly advise taxpayers doing business in multiple jurisdictions. This article provides an overview of some developments in key states outside of New York.
Pennsylvania 2017 Tax Amnesty Program
The Pennsylvania Department of Revenue has issued guidelines for the 2017 Tax Amnesty Program, provided for in Pa. Stat. Ann. 72 section 9901-G. The guidelines, contained in “Notices: 2017 Tax Amnesty Program Guidelines,” provide an overview of the program, definitions, and participation requirements. The program will run from April 21, 2017, to June 19, 2017, and cover all taxes administered by the Pennsylvania Department of Revenue where a delinquency exists as of December 31, 2015. Under the program, the department will waive all penalties and 50% of the interest due on such delinquent taxes eligible for amnesty. It must be noted, however, that individuals, businesses, or other entities that participated in the state’s 2010 Tax Amnesty Program are ineligible to participate in this program.
In order to qualify for the program, a taxpayer must 1) file the tax amnesty return(s) online, 2) make payment of all tax and interest owed, 3) file complete tax returns for all required tax periods for which the taxpayer has not previously filed a tax return, 4) file completed amended returns for all periods for which the taxpayer has underreported a tax liability, and 5) file all required tax returns for those periods not eligible for the program.
Tax returns and reports eligible for amnesty must be received, along with tax payments and interest, by June 19, 2017; there is no extension.
California Refund Claims and Possible Amended Regulations
The California Board of Equalization (BOE) has begun processing claims for refunds in cases similar to Lucent Technologies, Inc. v. State Board of Equalization [193 Cal. Rptr. 3d 323 (2015)]. Based on this decision, the BOE is also holding meetings of interested parties regarding amendments to Sales and Use Tax Regulation 1507, Technology Transfer Agreements (TTA), and Sales and Use Tax Regulation 1502, Computers, Programs, and Data Processing.
In Lucent, the California Court of Appeals held that Lucent’s charges to certain telephone companies for software on storage media as part of a TTA were not subject to sales tax. The court also held that sales tax should only be imposed on the blank tapes and discs used to transmit the software. As defined in the relevant statutes, a TTA is “any agreement under which a person holding a patent or copyright interest assigns or licenses the right to make and sell a product or use a process that is subject to the patent or copyright interest.” The applicable statute provides an exemption for the amount charged for the intangible assets transferred with tangible personal property in any TTA.
A claim for refunds of the tax paid by a retailer on a sale covered by the Lucent decision may be made directly with the BOE, if the staff can verify that the claim is 1) between an exclusive holder-retailer, such as Lucent, and a licensee, such as the telephone companies involved in the case; or 2) involved software being transmitted to the licensee on tangible storage media that was “wholly collateral” to the licensee’s use of the licenses regarding that software, such as tapes and discs. A consumer who paid sales tax to a vendor, however, must obtain the refund directly from the vendor.
CPAs should review the taxability of a taxpayer’s products to determine if they are TTAs that qualify for a sales and use tax exemption and may be eligible for a refund.
Pennsylvania Court Case on Nonbusiness Income and NOL Carryovers
The Pennsylvania Commonwealth Court has held that the amount realized from the partial liquidation of a limited partnership interest (LPI) was nonbusiness income not subject to apportionment. The court also ruled that Pennsylvania’s cap on the use of net operating loss (NOL) carryovers violated the Uniformity Clause of the Pennsylvania Constitution [RB Alden Corp. v. Commonwealth of Pennsylvania (Pa. Comm. Ct., No. 73 F.R. 2011 (6/15/2016))].
The taxpayer in Alden sold a portion of its LPI in 2006 and treated the gain as nonbusiness income. In addition, the taxpayer had accumulated NOLs from prior years of more than $2,000,000, which it had carried over to 2006. In 2009, the Pennsylvania Department of Revenue rejected both of these positions and issued a deficiency notice that was upheld on appeal by both the state’s Board of Appeals and Board of Finance and Revenue.
The taxpayer appealed the decision to the Pennsylvania Commonwealth Court, arguing that 1) the gain should be considered nonbusiness income, because the sale of the LTI was not in the ordinary course of the taxpayer’s business; and 2) limiting its NOL carryover deduction to $2 million violated the Uniformity Clause of the Pennsylvania Constitution.
The court’s decision makes it clear that gain from the sale of an LTI that is not in the ordinary course of a corporation’s business is nonbusiness income, and other corporations may have the same issue. The position that the limitation on the use of NOL carryovers violates the Uniformity Clause of the Pennsylvania Constitution may also affect a number of corporations. If a corporation is affected by this decision, it should consider filing amended returns for open years to claim refunds based on Alden. Needless to say, CPAs who have clients operating in Pennsylvania should evaluate the impact of this decision and determine if amended returns or refund claims need to be filed.
Michigan Law on Pass-Through Entity Withholding
Michigan’s House Bill 5131, recently signed into law, eliminated the requirement that flow-through entities (FTE) withhold Michigan income tax on income distributable to nonresident owners. The new law is effective for tax years beginning on or after July 1, 2016. It does not affect an FTE’s ability to file a composite return and make composite tax payments on behalf of qualifying nonresident partners, members, or shareholders. An FTE includes S corporations, partnerships, and limited liability companies; publicly traded partnerships are not FTEs.
As a result of this new law, partners, members, and shareholders of FTEs will be expected to pay their Michigan state income tax, including estimated taxes, directly to the Michigan Department of Treasury, if the FTE does not pay such tax on the partner’s, member’s, or shareholder’s behalf. FTEs subject to taxation in Michigan should notify their nonresident partners, members, or shareholders if the FTE is not making any required tax payments on their behalf, so that they can timely make the necessary estimated tax payments.