State Tax Matters The power of knowing. June 15, In this issue:

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1 State Tax Matters The power of knowing. In this issue: Articles: Supreme Court May Reassess Quill s Physical Presence Standard... 2 Administrative/Amnesty: California OTA Issues Revised Draft Proposed Permanent Regulations on Administration and Procedures of Appeals and Petitions for Rehearing... 2 Louisiana: New Law Clarifies that Certain Reductions and/or Suspensions of Tax Benefits, Credits, and Exemptions Enacted via 2015 Legislative Changes were Temporary... 3 North Carolina: New Law Updates State Conformity to IRC, Responds to Some Provisions of the Federal 2017 Tax Act, and Revises Sales Factor Sourcing Rules... 3 US Supreme Court Denies Taxpayer s Request to Review 2017 Pennsylvania Supreme Court Ruling on NOL Carryovers... 4 Rhode Island Division of Taxation Releases Guidance on Treatment of IRC Sec. 965 Income for C Corporations, and Accompanying Proposed New Regulation... 5 Texas Appellate Court Holds that Taxpayer Provides Services Rather than Goods for Purposes of Calculating Deductible Costs of Goods Sold under Franchise Tax... 5 Virginia: Once Again, Enacted Budget Includes Non-Codified Provisions Related to Intercompany Intangible Expense Addback Statutes... 6 Washington: City of Seattle Poised to Repeal Recently Enacted Employee Hours Tax... 6 Miscellaneous: New York City: New Commercial Rent Tax Credit Becomes Available July Multistate Tax Alerts... 7 State Tax Matters Page 1 of 9 Copyright 2018 Deloitte Development LLC

2 Articles: Supreme Court May Reassess Quill s Physical Presence Standard Michael Bryan, Snowden Rives, and Sara Clear of Deloitte Tax analyze the oral arguments made before the US Supreme Court in April in South Dakota v. Wayfair Inc. regarding whether a state can require a remote seller to collect sales tax based on economic presence. This article discuss the justices concerns with the burden on small businesses of retroactive application of such an obligation and the constitutionality of prospective application. URL: Administrative/Amnesty: California OTA Issues Revised Draft Proposed Permanent Regulations on Administration and Procedures of Appeals and Petitions for Rehearing Proposed Permanent Text of California Code of Regulations, Title 18. Division 4. Office of Tax Appeals Rules for Tax Appeals [Revised Draft Proposed CCR Title 18, Division 4, Regs. Sections 30000, 30100, 30101, et al.], Cal OTA (6/1/18). The California Office of Tax Appeals (OTA) has issued amended proposed regulations regarding appeals and petitions for rehearing submitted with or subject to the jurisdiction of the OTA, which was created pursuant to legislation enacted in 2017 [A.B. 102; see previously issued Multistate Tax Alert for more details on this 2017 legislation] that revamped the California State Board of Equalization (BOE) by forming two new tax agencies known as the California Department of Tax and Fee Administration (CDTFA) and the OTA to take over many of the BOE s key functions. The OTA was established by the new law on July 1, 2017, and starting January 1, 2018, began conducting appeals on taxes and fees that were previously conducted by the BOE, such as appeals on franchise and personal income tax, sales and use tax, and other special taxes and fees. Note that while these proposed permanent regulations are undergoing drafts, edits, and the normal administrative rule-making approval process, the OTA is currently operating under adopted temporary emergency regulations that are in effect through December 31, According to the OTA, such permanent regulations are required for it to continue to carry out its duties, powers, and responsibilities following the expiration of the current emergency regulations. Written comments on this most recent proposal are due by June 27, Please contact us with any questions or comments. URL: URL: URL: URL: Christopher Campbell (Los Angeles) Principal cwcampbell@deloitte.com Valerie Dickerson (Washington, DC) vdickerson@deloitte.com Brian Toman (San Francisco) Special Advisor btoman@deloitte.com Steve West (Los Angeles) stevewest@deloitte.com Kent Strader (San Francisco) kstrader@deloitte.com Shirley Wei (Los Angeles) shiwei@deloitte.com State Tax Matters Page 2 of 9 Copyright 2018 Deloitte Development LLC

3 Louisiana: New Law Clarifies that Certain Reductions and/or Suspensions of Tax Benefits, Credits, and Exemptions Enacted via 2015 Legislative Changes were Temporary H.B.13, signed by gov. 6/12/18. Effective immediately, new law provides that certain state corporate income tax limitations on exclusions and deductions that were enacted pursuant to 2015 legislation [see previously issued Multistate Tax Alert for more details on the 2015 legislation], including the 72% limitation on dividends received deductions, apply to an exclusion from taxable income and a claim for a deduction made on the return for each of the taxable years beginning during the calendar years of 2015, 2016, and 2017, regardless of the date the original or any amended return for the period is filed. The new law also disallows the portion of exclusions or deductions limited under these provisions if they are claimed on an amended return filed on or after July 1, URL: URL: See forthcoming Multistate Tax Alert for more details on this new law, as well as related taxpayer considerations, and please contact us with any questions in the meantime. Michael Matthys (Houston) mmatthys@deloitte.com Robert Topp (Houston) rtopp@deloitte.com North Carolina: New Law Updates State Conformity to IRC, Responds to Some Provisions of the Federal 2017 Tax Act, and Revises Sales Factor Sourcing Rules S.B. 99 / S.L , Senate and House override Governor s veto as of 6/12/18. Effective immediately, new law generally updates corporate and individual income tax conformity with the Internal Revenue Code (IRC) as in effect as of February 9, 2018 (previously, January 1, 2017). Responding to some provisions of the federal 2017 Tax Act (i.e., P.L ), the new law includes state corporate income tax deductions for amounts included in federal taxable income under IRC Sec. 951A regarding global intangible low-taxed income (GILTI), as well as the IRC Sec. 965 transition tax (note that these state deductions must be calculated net of certain related expenses). The new law also provides addition adjustments for amounts deducted under IRC Secs. 250 and 965(c); however, the legislation generally maintains conformity to the new federal interest deduction limits under IRC Sec. 163(j), which are still then subject to North Carolina s previously imposed limitations on interest. Some other tax provisions in this budget bill revise language related to i) state corporate income and franchise tax apportionment regarding the sourcing of receipts from certain services and intangibles for sales factor computation purposes, ii) North Carolina s franchise tax net worth base computation, and iii) the filing of amended state returns associated with federal income tax return changes and adjustments (i.e., federal RARs ). URL: Note that state corporate income tax rate reductions enacted during 2017 [see previously issued Multistate Tax Alert for more details on this 2017 legislation], which generally decrease the rate from 3 percent to 2.5 percent effective for tax years beginning on or after January 1, 2019, remain in effect. URL: See forthcoming Multistate Tax Alert for more details on this new law, as well as related taxpayer considerations, and please contact us with any questions in the meantime. State Tax Matters Page 3 of 9 Copyright 2018 Deloitte Development LLC

4 John Galloway (Charlotte) Art Tilley (Charlotte) Emily Dean (Charlotte) US Supreme Court Denies Taxpayer s Request to Review 2017 Pennsylvania Supreme Court Ruling on NOL Carryovers Docket No , US (petition for certiorari denied June 11, 2018). The US Supreme Court has denied the taxpayer s request to review the Pennsylvania Supreme Court s 2017 ruling which held that the fixed-dollar statutory cap of $3 million on Pennsylvania s net operating loss (NOL) carryover deduction, as applied to the taxpayer and year at issue, violated the Uniformity Clause of the Pennsylvania Constitution [see previously issued Multistate Tax Alert for more details on this 2017 decision]. The taxpayer s petition had focused on the appropriate remedy to apply to the 2007 taxable year at issue, positing that while the Pennsylvania Supreme Court agreed with the taxpayer s unconstitutionality claim, it failed to address the taxpayer s assertion that the Due Process Clause of the Fourteenth Amendment entitled it to a remedy. The taxpayer had essentially asked the US Supreme Court to consider whether the Due Process Clause requires a state to make a remedy available to a taxpayer if the collection of a tax violates settled state law. URL: URL: Note that since the Pennsylvania Supreme Court s 2017 ruling, the Pennsylvania Department of Revenue has issued administrative bulletins stating that it will apply the Pennsylvania Supreme Court decision prospectively (i.e., the fixed-dollar cap on the NOL would not be available for taxable years beginning in 2017 and thereafter), and that it will not apply the 2017 decision to taxable years beginning prior to January 1, Also note that legislation enacted in 2017 [H.B. 542 [Act 43]; see State Tax Matters, Issue , for more details on this legislation] has increased the percentage cap of taxable income on Pennsylvania s NOL carryover deduction for state corporate net income tax purposes to 35% of taxable income in 2018 (previously 30%), and then to 40% of taxable income in 2019 and thereafter. Please contact us with any questions. URL: URL: Kenn Stoops (Philadelphia) kstoops@deloitte.com Stacy Ip-Mo (Philadelphia) sipmo@deloitte.com Bob Kovach (Pittsburgh) rkovach@deloitte.com State Tax Matters Page 4 of 9 Copyright 2018 Deloitte Development LLC

5 Rhode Island Division of Taxation Releases Guidance on Treatment of IRC Sec. 965 Income for C Corporations, and Accompanying Proposed New Regulation Advisory for Tax Professionals , R.I. Div. of Tax. (6/11/18). The Rhode Island Department of Revenue s Division of Taxation (Division) has released an advisory and an accompanying proposed new administrative regulation [ Treatment of Repatriated Income 2017 (280-RICR )] on the state income tax treatment of Internal Revenue Code (IRC) Sec. 965 income for C corporations, including how to report deferred foreign income for Rhode Island tax purposes, in light of the federal 2017 Tax Act (i.e., P.L ). Under the Division s proposed new regulation, C corporations would include, as Rhode Island income for tax year 2017, the amount of their net IRC Sec. 965 income that is, IRC Sec. 965 income less federal deductions provided under IRC Sec The Division s proposed new regulation also includes information on i) whether a Rhode Island dividends-received deduction (DRD) would be allowed against net IRC Sec. 965 income, ii) related apportionment computations, iii) whether deferral of the Rhode Island tax payment is allowed, and iv) associated filing procedures and penalty relief. A public hearing on the proposed new administrative rule will be held on June 21, 2018, and the underlying public comment period ends on July 12, URL: URL: Proposed.pdf Note that the Division previously issued advisories on the state income tax treatment of IRC Sec. 965 income for individuals, pass-through entities, and fiduciaries [See State Tax Matters, Issue , for more details on some of this earlier guidance]. Please contact us with any questions or comments. URL: Mike Degulis (Boston) Principal mdegulis@deloitte.com Alexis Morrison-Howe (Boston) alhowe@deloitte.com Mike Mastroianni (Boston) mimastroianni@deloitte.com Texas Appellate Court Holds that Taxpayer Provides Services Rather than Goods for Purposes of Calculating Deductible Costs of Goods Sold under Franchise Tax Case No CV, Tex. Ct. App. (6/7/18). A Texas Court of Appeals (Court) has affirmed that a taxpayer s provision of various telecom products constituted the provision of services rather than tangible goods under Texas statutory definitions and case law. Accordingly, the taxpayer could not deduct its underlying electricity costs in providing such telecom services for purposes of calculating its deductible costs of goods sold under the Texas franchise tax (commonly referred to as the Texas margin tax). In doing so, the Court explained that by supplying internet access, telephone connectivity, and video streams to private consumers through a network of cables and wires, the taxpayer was providing services as that term is commonly used, and that case law involving certain facility-related exhibition costs and deductions available to movie theaters [see previously issued Multistate Tax Alert for more details on this 2017 case] has limited application and did not apply to the taxpayer in this case. Please contact us with any questions. URL: URL: State Tax Matters Page 5 of 9 Copyright 2018 Deloitte Development LLC

6 Russell Brown (Dallas) Robert Topp (Houston) Grace Taylor (Houston) Virginia: Once Again, Enacted Budget Includes Non-Codified Provisions Related to Intercompany Intangible Expense Addback Statutes H.B. 5001, signed by gov. 6/7/18. Applicable retroactively for taxable years beginning on and after January 1, 2004, Virginia s recently enacted budget bill includes non-codified provisions that limit the subject to tax statutory exception to Virginia s intercompany intangible expense addback statute regarding income that is subject to a tax based on or measured by net income or capital imposed by Virginia, another state, or a foreign government to the portion of intercompany expense payments to the related member that corresponds to the portion of the related member s income where it has sufficient nexus to be subject to taxes based on or measured by net income or capital in other states i.e., on a post-apportionment basis. Also retroactively for taxable years beginning on and after January 1, 2004, the budget bill includes non-codified provisions that limit the unrelated party safe harbor statutory exception to Virginia s intercompany intangible expense addback statute to the portion of such income derived from licensing agreements for which the rates and terms are comparable to the rates and terms of agreements that the related member has actually entered into with unrelated entities. URL: URL: Note that these same non-codified provisions were also included in state budget bills enacted in previous years, and thus they are essentially being continued with this most recent enactment. Please contact us with any questions. Dave Vistica (Washington, DC) dvistica@deloitte.com Jennifer Alban-Bond (McLean) jalbanbond@deloitte.com Washington: City of Seattle Poised to Repeal Recently Enacted Employee Hours Tax Council Bill No. CB , passed City of Seattle Council on 6/12/18. The City of Seattle (City) Council has passed an ordinance, which Mayor Jenny A. Durkin has indicated that she will sign into law, that repeals the recently enacted employee hours tax [Council Bill No. CB ; see State Tax Matters, Issue , for more details on this new employee hours tax], which would have been imposed on certain businesses with employees working in the City beginning January 1, If not for this repeal, this new tax generally would have been imposed on businesses with more than $20 million in City-sourced gross receipts, with some exceptions, at a rate of $ per employee hour worked in the City. Please contact us with any questions. URL: URL: F44044&Options=Advanced&Search=&FullText=1 URL: State Tax Matters Page 6 of 9 Copyright 2018 Deloitte Development LLC

7 Doug Andersen (Seattle) Robert Wood (Seattle) Myles Brenner (Seattle) Miscellaneous: New York City: New Commercial Rent Tax Credit Becomes Available July 1 NYC L.L. 254 (Intro. No. 799), signed by mayor on 12/22/17. Effective July 1, 2018, qualifying taxpayers doing business in New York City that pay less than $500,000 in annual base rent and earn less than $5 million in total income in the preceding tax year may be eligible to receive a full tax credit against their New York City commercial rent tax liability. Under the recently amended applicable law, total income generally is defined as the amount reported for federal income tax purposes in the preceding federal tax year. These recent amendments also provide for a partial tax credit against the New York City commercial rent tax on a sliding scale for otherwise qualifying taxpayers with higher annual base rent and total income thresholds, so long as these amounts do not exceed $550,000 and $10 million, respectively. Note that while these recent law changes may impact a subject tenant s overall New York City commercial rent liability, it does not affect its underlying filing obligation; accordingly, a tenant must still file such tax returns when it has at least $200,000 in annual base rent. Also note that the New York City Department of Finance apparently is in the process of determining how the income of entities with common ownership are combined for purposes of calculating whether these various income thresholds are exceeded. URL: C639AF&Options=ID Text &Search=799 As an overview, New York City s commercial rent tax generally is imposed on base rent paid for commercial premises located south of 96th Street in Manhattan at an effective 3.9% tax rate, and is administered on a fiscal year basis running from June 1 through May 31. Please contact us with any questions about this tax and these recent law changes. Tony Gulotta (New York) agulotta@deloitte.com Philip Lee (Jericho) philee@deloitte.com Brianne Moriarty (New York) bmoriarty@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: California FTB Issues Notice Allowing Oral Hearings for FTB-Initiated Proposed Variances from the Standard Apportionment Formula On May 24, 2018, the California Franchise Tax Board (FTB) issued FTB Notice , permitting a taxpayer or its representative to request an oral hearing before a FTB staff member in connection with a FTB staff-initiated proposed State Tax Matters Page 7 of 9 Copyright 2018 Deloitte Development LLC

8 variance from the standard apportionment formula under California Revenue and Taxation Code (CRTC) Section This Multistate Tax Alert briefly discusses FTB Notice , as well as the related administrative process. [Issued June 5, 2018] URL: Connecticut Enacts New Pass-Through Entity Tax and Other Tax Law Changes On May 31, 2018, Governor Dannel Malloy signed Senate Bill 11 (SB 11). The majority of SB 11 s provisions are in response to recent federal tax reform legislation, the most notable being the enactment of a new pass-through entity (PET) income tax levied at the top personal income tax rate and offset by a credit at the personal or corporate income tax level. The PET is applicable to taxable years commencing on or after January 1, 2018 and affected taxpayers should take note of the potential for a June 15 estimated tax installment payment. SB 11 also enacts changes to Connecticut s tax laws affecting individuals and corporations, applicable to taxable years commencing on or after January 1, 2017 unless otherwise noted, including the following: Amends the required add-back of expenses related to the dividend received deduction (DRD) at five percent of all dividends received for corporate tax purposes; Decouples from IRC Section 168(k) bonus depreciation for individual income tax purposes; Effective for income years commencing on or after January 1, 2018, decouples from IRC Section 163(j) for corporate income tax purposes; and Effective July 1, 2018, authorizes municipalities to issue residential property tax credits to eligible individual taxpayers who make contributions to approved community supporting organizations. This Multistate Tax Alert summarizes these law changes and provides some taxpayer considerations. [Issued June 7, 2018] URL: Enacted Indiana Legislation Provides for IRC Conformity Update, Decouples from New IRC Section163(j) and Expands DRD On May 14, 2018, Indiana Governor Eric Holcomb signed House Bill 1316(ss), which amended Indiana s tax laws in response to federal tax reform. H.B. 1316(ss) includes the following notable amendments: Effective retroactive to January 1, 2018, updates the Internal Revenue Code (IRC) conformity date to February 11, 2018 for both individual and corporate income tax purposes; For tax years beginning after 12/25/2016, requires deemed repatriation income under IRC Section 965(a) to be added back for corporate income tax purposes and requires the deduction under IRC Section 965(c) to be added back for individual income tax purposes; Expands the foreign source dividend deduction for corporate income tax purposes to include income associated with IRC Section 965 and IRC Section 951A for taxable years after December 25, 2016; Prescribes rules for the treatment of receipts in apportionment for IRC Section 965 and IRC Section 951A for taxable years beginning after December 25, 2016; Effective retroactive to January 1, 2018, decouples from IRC Section 163(j) interest limitations rules; and Effective retroactive to January 1, 2018, updates the Indiana Net Operating Loss (NOL) carryforward period from being tied to IRC Section 172(b) to being limited to a 20 year carryforward period. This Multistate Tax Alert summarizes these law changes and provides some taxpayer considerations. [Issued June 11, 2018] URL: State Tax Matters Page 8 of 9 Copyright 2018 Deloitte Development LLC

9 About Deloitte Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee ( DTTL ), its network of member firms, and their related entities. DTTL and each of its member firms are legally separate and independent entities. DTTL (also referred to as Deloitte Global ) does not provide services to clients. In the United States, Deloitte refers to one or more of the US member firms of DTTL, their related entities that operate using the Deloitte name in the United States and their respective affiliates. Certain services may not be available to attest clients under the rules and regulations of public accounting. Please see to learn more about our global network of member firms. Copyright 2018 Deloitte Development LLC. 36 USC State Tax Matters Page 9 of 9 Copyright 2018 Deloitte Development LLC