On June 20, 2019, both the NYS Assembly and Senate passed bills that made significant changes to the state’s treatment of two hot tax issues: the taxation of global intangible low-taxed income (“GILTI”), and the state’s threshold for establishing economic nexus for sales tax purposes. According to the Senate and Assembly websites, the legislation was signed into law by Governor Cuomo on June 24th.
On June 4, 2019, Gov. Ned Lamont announced that Connecticut’s Democrat-controlled Assembly passed the $43.35 billion FY 2020 Budget (the “Budget Plan”). The Final Bill (H.B. 7424) cleared the Senate on June 4 and the House on June 3. It aims to resolve a $3.7 billion multi-billion dollar deficit largely through tax and revenue hikes, increasing spending by 1.7% in fiscal year 2020 and by 3.4% in 2021. As of June 13, it has not been signed by the Governor. This is just a formality as he stands behind this Budget Plan.
The New York State Division of Taxation and Finance (the “Department”) issued information entitled “FAQs related to registration requirement for businesses with no physical presence in NYS” (“FAQs”) on May 1, 2019 to address questions concerning sales tax collection by businesses without a physical presence in New York.
Wow.
This morning the U.S. Supreme Court sent a shockwave through the Internet—and the SALT community—by issuing its long-awaited decision in the South Dakota v. Wayfair case and resoundingly overturning the Quill physical-presence nexus standard that had been the law of the land for sales tax purposes for the past several decades.
Matter of CLM Enterprises illustrates the long-established rule that form always wins over substance in the sales tax area. The taxpayer was a holding company that owned several car dealerships, all as single member LLCs, which are disregarded for income tax purposes but NOT sales tax purposes. The issue in the case concerned how it was treating loaner cars. For several administrative and liability reasons, the group decided that all loaner cars should be titled to the taxpayer. The loaner cars initially were acquired by the dealerships, but then were transferred by the dealerships to the taxpayer. No cash changed hands, however. This was not a “sale” in the ordinary context. Whatever the case, when customers used the loaner cars, expenses associated with this were allocated to the respective dealership.
Last week we had the opportunity to attend the first annual New York State Tax Summit, a daylong seminar put on by the New York State Department of Taxation and Finance at their offices in Brooklyn. It was a fantastic event, with senior Department officials presenting a wide variety of topics and issues for discussion. There were close to 200 attendees present. And the Agenda was impressive. Here are some of the highlights of the day:
Most people’s understanding of the Internet extends about as far as their eyes can see. In other words, they know that if they type a few words into the little white box beneath the colorful Google logo, within a fraction of seconds, hundreds of thousands of (hopefully) helpful results will appear on the screen. And that’s awesome. But few people, myself included, fully understand what takes place beyond the keyboards, screens, and cords. In fact, many people are likely willfully blind to the back-end operations of the Internet.
We recently authored an article in State Tax Notes analyzing New York’s complicated rules affecting sales taxation of contractor services and capital improvements. In this follow-up post, we want to highlight a few practical problems and issues that taxpayers frequently confront by taking a look at several recently litigated cases involving capital improvements.
Businesses become entangled in these rules quite often. The rules themselves are complicated, and the answer to the question “Is this subject to tax?” nearly always depends upon the specific facts. For anyone who is sitting down to perform a client’s or company’s weekly bookkeeping or, worse, for those who are facing an audit, we can draw a few useful lessons by looking at the recent misfortune of others. A quick survey reveals that, so far this year, at least four different cases involving claims of capital improvements went all the way to trial and were litigated in New York. In each case the auditor – not the taxpayer – won. Let’s take a quick peek at these cases to see why.
The term “cloud computing” is broad enough to cover a vast array of transactions, all of which use the Internet in some fashion. Two of the most prevalent forms of cloud computing are “software as a service” (SaaS) and “infrastructure as a service” (IaaS). SaaS refers to transactions where software is accessed by a customer remotely over the Internet. The customer does not receive a copy of the software, and the software does not reside on the customer’s hardware. Rather, the customer gains access to the software typically by using its own Internet browser. IaaS refers to transactions where a customer remotely accesses hardware over the Internet. The customer never takes physical possession of the hardware. Rather, the customer accesses the service provider's hardware instead of purchasing and maintaining its own hardware.
Piggy-backing on my colleague Drew’s sales tax update last week on new use tax rules for yachts already in effect, I’m writing with another timely update on New York’s soon-to-be-effective sales and use exemption rules for “general aviation aircraft”.
In less than 40 days, the exempt status previously reserved only for “commercial aircraft” will be extended to include “general aviation aircraft” in New York, which include recreational planes, private and corporate jets and helicopters, etc.—basically, aircraft used in civil aviation that aren’t “commercial aircraft.” As part of the 2015-2016 budget bill, the New York Legislature adjusted the rules imposing sales and use tax on nonresident—and resident—aircraft owners alike. The Legislature added a new exemption to Tax Law section 1115 for general aviation aircraft, which is defined to include all aircraft “used in civil aviation,” except commercial aircraft used to transport persons or property for hire. It joins the exemption already on the books for sales and use tax on commercial aircraft primarily engaged in intrastate, interstate, or foreign commerce. The new rule will also exempt sales of machinery or equipment installed on the aircraft. The rule does not exempt drones—sorry, all you early adopters out there.
Fourth of July has come and gone. This year, nonresidents (more on this later) who brought a new boat to New York for the first time were hit with a breath of fresh air—and I’m not talking about the fresh air from [insert any of New York’s many boater-friendly bodies of water]. In years past, nonresidents who purchased a boat outside of New York and later brought that boat into New York were hit with full New York use tax on the purchase price or fair market value of that boat. As part of its 2015 budget, the New York State Legislature amended the sales and use tax rules applicable to boats.
In a few short years, marijuana has gone from being widely regarded as an illicit drug to being legalized for medical purposes in 23 states and for recreational purposes in four states – with others expected to follow suit in short order. New York State jumped on the bandwagon last year with the enactment of the Compassionate Care Act (the Act), a highly-regulated medical marijuana program. In fact, the Department of Health is currently accepting applications from would-be “registered organizations” (ROs) aspiring to be among the five ROs to receive the department’s blessing to cultivate and dispense medical marijuana from up to four locations around the state.
So why would sophisticated tax bloggers like us care? As tax nerds, we see tax issues everywhere! Indeed, the potential for states to grow tax revenue from marijuana sales has been a selling point on much of the state-level marijuana legislation from the outset. The potential is great: Colorado collected over $50 million in tax revenues and related fees in its first year. New York State, never one to forego a new tax, adds a new Article 20-B to the Tax Law under the Compassionate Care Act. Article 20-B imposes a 7% excise tax on every sale of medical marijuana by an RO to a “certified patient” or “designated caregiver” – both defined terms under the Act. That’s a pretty high tax rate…
It seems I can’t get through a work day lately without some tax alert, webinar invite, article, or tweet addressing the new IRS tangible property regulations. These new rules have caused quite the uproar in the tax community, as outlined by articles here, here, and here. These regulations are aimed at questions as to whether expenditures on tangible property are currently deductible, or whether they must be capitalized and recovered through depreciation over time. And the principal question that the final regulations address is whether expenditures relating to the maintenance and alteration of tangible property, including buildings and other fixed assets, are properly treated as repairs, which are currently deductible, or are required to be capitalized as an improvement to the property. That distinction—between deductible repairs and capital improvements—has been mostly developed through judicial decisions, based on facts and circumstances. But in 2003, the IRS issued Notice 2004-6 , announcing that it intended to propose regulations in this area. And with the expediency and speed we have come to expect from our government, final regulations were issued in September 2014, and more recently the IRS announced simplified procedures offering relied to certain small businesses.
One of the more interesting state tax issues we get to deal with as state and local tax practitioners involve questions in the sales tax area. One of the reasons is because the answer to every sales tax question is the same: “it depends.” State sales tax statutes have so many ins and outs, exemptions and exclusions, ifs, ands, ors, and buts that there rarely is a clear answer. And even if there is a clear answer, it often depends on the application of a variety of different facts and circumstances. This usually results in articles every year about the different tax consequences that can arise in silly circumstances, such as the taxability of bagels depending on whether or not they are sliced or not; candy bars being taxable based on whether or not they are in the candy or cookie aisle, etc.
But the other interesting aspect of sales tax is that it touches everybody: every business, every taxpayer, every industry. A couple of years ago, we started to learn this firsthand when a lot of my income tax clients in the Wall Street area started contacting me about sales tax issues. Sales tax on Wall Street? What can that be about?