State Tax Matters The power of knowing. February 8, In this issue:

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1 State Tax Matters The power of knowing. In this issue: Income/Franchise: California FTB Discusses Compliance with New Law that Requires Certain Partnerships to Report Adjustments under Centralized Federal Partnership Audit Regime within 6 Months... 2 DOR Issues Report to State Governor and Legislature on Impact of Federal Tax Cuts and Jobs Act... 2 Maryland Tax Court Holds that Out-of-State SMLLCs Owe Maryland Income Tax... 3 Missouri DOR Issues Guidance on State Corporate Tax Treatment of IRC Sec. 951A GILTI... 3 New Hampshire Department of Revenue Administration Issues New BPT Schedule for Making Reconciling Adjustments that Account for Some Federal TCJA Provisions... 4 New Jersey Appellate Court Affirms Gross Income Tax Assessment as Gains from Complete Liquidation Deemed Not Apportionable under CBT Law... 4 New Jersey: Subsidiary Must Add Back Tax Liabilities from Combined Reporting States for CBT Purposes Based on Pro Rata Share of Parent s Total Tax Obligations... 5 Ohio: Updated Guidance on Equity Investor Apportionment of Gain from Sale of Closely-Held Business, Potential Refunds... 5 Pennsylvania: City of Philadelphia DOR Explains Tax Treatment of Federal Repatriation Transition Tax for BIRT Purposes... 6 Sales/Use/Indirect: Maryland: Permanent Post-Wayfair Administrative Rule Requires Some Out-of-State Vendors to Collect and Remit Taxes... 7 Multistate Tax Alerts... 7 State Tax Matters Page 1 of 8 Copyright 2019 Deloitte Development LLC

2 Income/Franchise: California FTB Discusses Compliance with New Law that Requires Certain Partnerships to Report Adjustments under Centralized Federal Partnership Audit Regime within 6 Months Tax News, Cal. FTB (Feb. 2019). The California Franchise Tax Board (FTB) has issued compliance-related information pursuant to legislation enacted in 2018 [S.B. 274 (2018); see State Tax Matters, Issue , for more details on this new law], which requires certain partnerships subject to the new centralized federal partnership audit regime to report federal audit adjustments to the FTB within six months after the date of the final federal determination [note: see State Tax Matters, Issue , for more information on the centralized federal partnership audit regime, which generally is effective for tax years beginning after December 31, 2017, and any partnership that elects into the regime for taxable years beginning after November 2, 2015 and before January 1, 2018]. The FTB explains, New to the California 2018 Partnership Return of Income (FTB 565) and Limited Liability Company Return of Income (FTB 568) is the addition of a Partnership Level Tax line FTB 565, it s line 25 and FTB 568, it s line 5. According to the FTB, the sole purpose of this new line is to allow partnerships and limited liability companies classified as partnerships to report each change or correction made by the Internal Revenue Service (IRS) under the centralized partnership audit regime reiterating that each IRS change or correction should be reported to the FTB within six months after the date of each final federal determination. Note that this new line generally will be used by certain partnerships when 2018 or subsequent tax returns are amended in the future to report the additional California tax resulting from federal audit changes to that tax year. For more information or questions, please reach out to any of the following individuals listed below. URL: URL: URL: URL: Christopher Campbell (Los Angeles) Principal cwcampbell@deloitte.com Keith Gray kegray@deloitte.com Shirley Wei (Los Angeles) shiwei@deloitte.com DOR Issues Report to State Governor and Legislature on Impact of Federal Tax Cuts and Jobs Act Report: Examination of the Impact of the Tax Cuts and Jobs Act of 2017, Fla. Dept. of Rev. (2/1/19). The Florida Department of Revenue (Department) has released a 288-page report to the Florida Governor, President of the Senate, Speaker of the House of Representatives, and the chairs of appropriate legislative committees pursuant to state corporate income tax legislation enacted in 2018 [H.B. 7093; see previously issued Multistate Tax Alert for more details on some of these 2018 tax law changes] that required the Department to conduct a study to evaluate the impact of the federal Tax Cuts and Jobs Act (i.e., Public Law ) on Florida s corporate income tax. Regarding Internal Revenue Code (IRC) Sec. 951A global intangible low-taxed income (GILTI), the report generally concludes that Florida conforms to both the GILTI inclusion under IRC. Sec. 951A and the GILTI deduction under IRC Sec. 250 noting that given possible constitutional issues, policymakers may wish to consider creating a subtraction in Florida law for GILTI income to the extent it is included in taxable income. Regarding foreign-derived intangible income (FDII), the report explains that expenses related to the generation of FDII are deducted in the computation of federal taxable income and thus are also taken into account in the starting point for the Florida corporate income tax as a result, only a portion of FDII is taxed in Florida. The report also addresses numerous other state corporate income tax impacts of the federal tax law changes, including the interest expense deduction limitations under IRC Sec. 163(j). Please contact us with any questions. URL: State Tax Matters Page 2 of 8 Copyright 2019 Deloitte Development LLC

3 URL: URL: Chris Snider (Miami) Ian Lasher (Tampa) Ben Jablow (Tampa) Manager Maryland Tax Court Holds that Out-of-State SMLLCs Owe Maryland Income Tax Case Nos. 17-IN , 17-IN , Md. Tax Ct. (1/17/19). The Maryland Tax Court (Court) recently held that various out-of-state single member limited liability companies (SMLLCs) wholly-owned by another out-of-state limited liability company (Parent LLC) owed Maryland income tax under state law that imposes an income tax on each passthrough entity that has... any member who is a nonresident of the State or is a nonresident entity and any nonresident taxable income for the taxable year under Md. Code Ann., Tax-Gen, Sec (b) even though the SMLLCs had no federal income tax liability. Because each of the SMLLCs is a nonresident pass-through entity and each has a single member that is a nonresident of Maryland, the Court explained that Maryland tax is imposed at the rate of 8.25% on the nonresident taxable income allocable to Maryland. In doing so, the Court reasoned that the taxability of individuals and corporations in Maryland does not turn on whether a taxpayer actually completed a federal return and that Maryland is concerned with the figures calculated by the rules of the return, not the physical act of completion. Accordingly, while the Parent LLC may not be obliged to complete a Form 1120 for the federal government, it and its subsidiaries are clearly required to do so in order to complete the Maryland return. The Court explained that the SMLLCs have Maryland taxable income liability and as disregarded entities do not receive the same tax treatment as their nonresident owner. Please contact us with any questions. URL: Joe Carr (McLean) josecarr@deloitte.com Jim McNiff (McLean) jamcniff@deloitte.com Missouri DOR Issues Guidance on State Corporate Tax Treatment of IRC Sec. 951A GILTI Policy Guidance: Tax Cuts and Jobs Act (IRC Section 965 Transition Tax: Tax Years 2016 and 2017), Mo. Dept. of Rev. (10/18). The Missouri Department of Revenue (Department) has issued guidance on Missouri s corporate income tax treatment of Internal Revenue Code (IRC) Sec. 951A global intangible low-taxed income (GILTI), explaining that the net GILTI amount (i.e., IRC Sec. 951A income, less related IRC Sec. 250 deductions) generally must be included in a corporate taxpayer s federal taxable income and that, for many Missouri corporate taxpayers, this amount potentially may be offset in whole or in part as nonbusiness income, non-missouri dividends, or as part of Missouri s dividends deduction. URL: The guidance explains that for corporate taxpayers apportioning using Method One, Three Factor Apportionment, if the net GILTI amount constitutes the taxpayer s business income, an apportioned share of the net GILTI amount may be subtracted through the Missouri Dividends Deduction on MO-1120, Line 10. To the extent the GILTI amount constitutes nonbusiness income, the amount should be included on Forms MO-NBI and also on MO-MS, Part 1, Lines 9 or 12. Taxpayers reporting nonbusiness income must include on the Form MO-NBI a sufficiently detailed description of their business, the nonbusiness income, and an explanation of why the income is reported as nonbusiness income. State Tax Matters Page 3 of 8 Copyright 2019 Deloitte Development LLC

4 The guidance additionally explains that the net GILTI amount does not constitute property or payroll for purposes of computing the apportionment factor using three factor apportionment. To the extent it is not allocated, the net GILTI amount generally must be included in the sales factor for three factor apportionment purposes if it qualifies as a sale pursuant to 12 CSR (19), 12 CSR (42), and/or 12 CSR (64)(c). For corporate taxpayers using Method Two or Two A, the guidance states that an apportioned share of the net GILTI amount generally must be included in the Missouri Dividends Deduction on MO-1120, Line 10, to the extent it is attributable to sources within Missouri. To the extent that this amount constitutes dividends from a non-missouri payer, it must be entered on MO-MS, Part 2, Line 12. To the extent this amount does not fall within either of these categories, it must not be included on MO-1120, Line 10 or MO-MS, Part 2, Line 12. The net GILTI amount generally does not constitute sales or business transacted for purposes of calculating the numerator or the denominator of the Method Two or Two A apportionment factors. Additional special guidance is provided for federal consolidated taxpayers filing separately in Missouri with such taxpayers generally having to determine their net GILTI amount for Missouri purposes as if they filed separate federal income tax returns. Please contact us with any questions. Anita Sims (St. Louis) asims@deloitte.com Charlie Fischer (St. Louis) chafischer@deloitte.com Chad Halloran (St. Louis) Manager chadhalloran@deloitte.com New Hampshire Department of Revenue Administration Issues New BPT Schedule for Making Reconciling Adjustments that Account for Some Federal TCJA Provisions Technical Information Release No , N.H. Dept. of Rev. (2/4/19). The New Hampshire Department of Revenue Administration (Department) has issued a technical information release (TIR) that notifies taxpayers of the new Schedule IV, Other Internal Revenue Code Reconciling Adjustments, applicable to the New Hampshire business profits tax (BPT) return for all entity types. According to the TIR, reconciling adjustments that should appear on the new Schedule IV are primarily attributable to certain provisions of the federal Tax Cuts and Jobs Act (i.e., P.L ), and the fact that New Hampshire currently adopts the Internal Revenue Code (IRC) as of December 31, 2016 for taxable periods beginning on or after January 1, 2018 including adjustments for global intangible low-taxed income (GILTI) under IRC Sec. 951A and business interest under IRC Sec. 163(j). The TIR notes that adjustments for IRC Sec. 179 expenses and bonus depreciation generally are reported directly on the BPT return and should not also be entered on the new Schedule IV. Please contact us with any related questions. URL: Bob Carleo (Boston) rcarleo@deloitte.com Liz Jankowski (Boston) ejankowski@deloitte.com New Jersey Appellate Court Affirms Gross Income Tax Assessment as Gains from Complete Liquidation Deemed Not Apportionable under CBT Law Case No. A T4, N.J. Super. Ct. App. Div. (1/31/19). The New Jersey Superior Court, Appellate Division (Court), has affirmed the New Jersey Tax Court s 2017 ruling and underlying state gross (individual) income tax assessment [see previously issued Multistate Tax Alert for more details on the lower court s ruling], which held that State Tax Matters Page 4 of 8 Copyright 2019 Deloitte Development LLC

5 the gain from a deemed asset sale under Internal Revenue Code (IRC) Sec. 338(h)(10) recognized by a New Jersey domiciled S corporation constituted non-operational income and therefore was non-apportionable and allocable to New Jersey pursuant to New Jersey corporation business tax (CBT) law based on the S corporation s domiciliary state of New Jersey. In doing so, the Court commented that the lower court s use of the terms presumption of correctness and presumption of validity may have overstated the deference generally owed to the New Jersey Division of Taxation s interpretation and application of tax statutes following its review of the facts and the law governing a particular issue. However, the Court nevertheless affirmed the lower court s ruling because it detected no instance where the judge failed to fully and fairly review the record developed by the parties before properly making her own independent determinations on the questions of law involved in this matter. Please contact us with any questions. URL: URL: Norm Lobins (Parsippany) nlobins@deloitte.com Mike Bryan (Philadelphia) mibryan@deloitte.com New Jersey: Subsidiary Must Add Back Tax Liabilities from Combined Reporting States for CBT Purposes Based on Pro Rata Share of Parent s Total Tax Obligations Docket No , N.J. Tax Ct. (1/31/19). In an unpublished decision, the New Jersey Tax Court (Court) recently held that for purposes of New Jersey s corporation business tax (CBT) addback adjustment under N.J.S.A. 54:10A-4 (k)(2)(c) for separate return filers that is, for taxes paid or accrued to a state or the District of Columbia on or measured by profits, income, business presence, or business activity in calculating a taxpayer s entire net income under the CBT state law requires the addback of taxes attributable to a New Jersey taxpayer s income in non-separate reporting states, even if the taxpayer was not the actual entity paying the out-of-state tax. In doing so, the Court concluded that N.J.S.A. 54:10A-4 (k)(2)(c) is independent of the filing and payment requirements of other states, and that the statutory term, taxes paid or accrued is meant to refer to the tax liability of an entity and not necessarily to the payer of the tax. Accordingly, the Court explained, N.J.S.A. 54:10A-4 (k)(2)(c) requires the addback of all taxes derived from the taxpayer s activities in other states, regardless of which entity paid the tax. In this respect, the taxpayer at issue (a wholly-owned financing subsidiary of its parent multinational) was required to add back its tax liabilities to combined reporting states based on its pro rata share of the parent s total tax obligations to those jurisdictions. The Court additionally held that intercompany payments made among the taxpayer and its affiliates pursuant to a tax sharing agreement were not relevant for purposes of calculating this CBT addback adjustment. Please contact us with any questions. URL: Norm Lobins (Parsippany) nlobins@deloitte.com Mike Bryan (Philadelphia) mibryan@deloitte.com Ohio: Updated Guidance on Equity Investor Apportionment of Gain from Sale of Closely-Held Business, Potential Refunds IT Guidance Relating to an Equity Investor s Apportionment of a Gain from the Sale of a Closely-Held Business (R.C ), Ohio Dept. of Tax. (updated 2/1/19). The Ohio Department of Taxation (Department) has issued an updated information release intended to provide guidance relating to an equity investor s apportionment of a gain from the sale of a closely held business for Ohio personal income tax purposes in light of an Ohio Supreme Court (Court) decision from 2016 [see previously issued Multistate Tax Alert for more details on this case], which held that an Ohio statute, Ohio Rev. Code Sec , as applied to the taxpayer at issue was unconstitutional under the Due Process Clause. To those taxpayers having utilized Ohio Rev. Code Sec in their calculation of Ohio State Tax Matters Page 5 of 8 Copyright 2019 Deloitte Development LLC

6 income tax liability, the Department explains the process for claiming potential underlying refunds based on this decision, and notes the following observations : URL: URL: The Court s analysis and holding were confined solely to Ohio Rev. Code Sec ; the analysis and holdings were not expanded to any other Ohio statute; The Court found that Ohio Rev. Code Sec was unconstitutional as applied to the specific taxpayer; the Court declined to find the statute unconstitutional on its face (i.e., the statute was not stricken down as unconstitutional in all situations; instead, it was found to be unconstitutional only in this situation); and The Court found that an ownership interest in a business is an intangible asset and that neither the taxpayer nor the sale of the asset had a taxable link to Ohio; thus, the Court followed the general rule of law that a capital gain derived from the sale of an intangible asset is allocable to the taxpayer s state of domicile as nonbusiness income. To this end, Ohio nonresident individuals who have paid tax under Ohio Rev. Code Sec on the sale of an interest in a pass-through entity (including partnerships, S corporations, and limited liability corporations) may want to consider their options in light of the Court s 2016 decision and these listed Departmental observations. Please contact us with any related questions. Dave Adler (Columbus) daadler@deloitte.com Courtney Clark (Columbus) courtneyclark@deloitte.com Pennsylvania: City of Philadelphia DOR Explains Tax Treatment of Federal Repatriation Transition Tax for BIRT Purposes Advisory Notice Repatriation Transition Tax Policy Update (Jan. 31, 2019), City of Philadelphia Dept. of Rev. (1/31/19). The City of Philadelphia (City) Department of Revenue (Department) has issued a policy update on how it treats the federal repatriation transition tax provisions under the 2017 Tax Cuts and Jobs Act (i.e., P.L ) for City Business Income and Receipts Tax (BIRT) purposes clarifying that both the repatriation transition tax income and the deduction would be reflected in the BIRT income tax base for Method II taxpayers (i.e., those who determine the Philadelphia income tax base with reference to their federal taxable income). For most BIRT Method II taxpayers, the advisory notice explains that the net repatriation transition tax income will be eligible for the following deductions: URL: Dividends received from another corporation of the same affiliated group, or Dividends received from a corporation of which the receiving corporation or partnership owns at least 20% of the voting power of all classes of stock and at least 20% of each class of nonvoting stock. For BIRT apportionment purposes, only dividends received from less-than-20% owned subsidiaries would be included in the sales factor because they are included in the BIRT income tax base. The guidance notes that the federal election to pay the repatriation transition tax liability over eight years is not applicable to the BIRT. Additionally, in calculating the BIRT gross receipts tax, the repatriation transition tax income is excluded as: Dividends received from another corporation of the same affiliated group, or Dividends received from a corporation of which the receiving corporation or partnership owns at least 20% of the voting power of all classes of stock and at least 20% of each class of nonvoting stock. In situations where taxpayers have reported the net repatriation transition tax income on their originally-filed BIRT returns contrary to this policy, the Department states that such taxpayers may choose to file an amended BIRT return to comply with this advisory notice. Additionally, the Department notes that because the repatriation transition tax income is not income that would be reflected in a taxpayer s books and records, these federal tax adjustments would not apply to BIRT Method I taxpayers. Please contact us with any questions. State Tax Matters Page 6 of 8 Copyright 2019 Deloitte Development LLC

7 Kenn Stoops (Philadelphia) Bob Kovach (Pittsburgh) Stacy Ip-Mo (Philadelphia) Aaron Leroy (Pittsburgh) Sales/Use/Indirect: Maryland: Permanent Post-Wayfair Administrative Rule Requires Some Out-of- State Vendors to Collect and Remit Taxes Permanent Regulation COMAR , Md. Cmptrlr. (eff. 2/11/19). Similar to its previously approved post- Wayfair emergency regulation [Emergency Regulation Approved by AELR Committee: COMAR Out-of- State Vendor; see State Tax Matters, Issue , for more details on this emergency regulation], the Maryland Comptroller has adopted a permanent administrative regulation providing that out-of-state vendors must collect and remit Maryland sales and use tax on their sales of tangible personal property or taxable services to Maryland customers beginning October 1, 2018, if during the previous or current calendar year, the vendor satisfies either of the following criteria: URL: URL: URL: The person s gross revenue from the sale of tangible personal property or taxable services delivered in Maryland exceeds $100,000; or The person sold tangible personal property or taxable services for delivery into Maryland in 200 or more separate transactions. Please contact us with any questions. Joe Carr (McLean) josecarr@deloitte.com Michael Bryan (Philadelphia) mibryan@deloitte.com Rick Heller (Parsippany) rickheller@deloitte.com Jim McNiff (McLean) jamcniff@deloitte.com Multistate Tax Alerts Throughout the week, we highlight selected developments involving state tax legislative, judicial, and administrative matters. The alerts provide a brief summary of specific multistate developments relevant to taxpayers, tax professionals, and other interested persons. Read the recent alerts below or visit the archive. Archive: No new alerts were issued this period. Be sure to refer to the archives to ensure that you are up to date on the most recent releases. State Tax Matters Page 7 of 8 Copyright 2019 Deloitte Development LLC

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