State Tax Matters The power of knowing. October 26, In this issue:

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1 State Tax Matters The power of knowing. In this issue: Administrative: California OTA Submits for Final Approval its Proposed Permanent Regulations on Administration and Procedures of Appeals and Petitions for Rehearing... 2 California FTB Modifies Legal Ruling on Doing Business to Reflect 2017 Appellate Court Ruling, Which Held that Passive LLC Interest Alone Is Not Doing Business... 2 Ohio DOT Explains New Law Updating State Conformity to IRC, Specifically Election to Follow Prior Version of IRC... 3 Pennsylvania Ruling Holds that Taxpayer s Satellite TV Services and Leased Property Must be Sourced Based on Customer Location... 3 South Carolina DOR Explains New Law Updating State Conformity to IRC, Including Decoupling from Various Provisions of the TCJA... 4 Sales/Use/Indirect: Rhode Island DOT Affirms that, Based on Pre-Wayfair Doctrines, Online Retailer Does Not Have Substantial Nexus through In-State Retail Affiliate... 4 Sales/Use/Indirect: Texas Comptroller Issues Proposed Post-Wayfair Remote Seller Nexus Rules with October 1, 2019 Implementation Date, and $500,000 Safe Harbor... 5 Multistate Tax Alerts... 5 State Tax Matters Page 1 of 6 Copyright 2018 Deloitte Development LLC

2 Administrative: California OTA Submits for Final Approval its 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 (10/10/18). The California Office of Tax Appeals (OTA) has finalized and submitted for ultimate approval by the California Office of Administrative Law (OAL) its proposed permanent 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 finalization through the normal administrative rule-making approval process, the OTA is currently operating under adopted temporary emergency regulations that are in effect through December 31, If approved, these permanent regulations would become effective January 1, Please contact us with any questions or comments. URL: URL: URL: URL: Christopher Campbell (Los Angeles) Principal cwcampbell@deloitte.com Kent Strader (San Francisco) kstrader@deloitte.com Steve West (Los Angeles) stevewest@deloitte.com Shirley Wei (Los Angeles) shiwei@deloitte.com California FTB Modifies Legal Ruling on Doing Business to Reflect 2017 Appellate Court Ruling, Which Held that Passive LLC Interest Alone Is Not Doing Business Legal Ruling : Modification of Legal Ruling , Business Entities that are Members of Multiple-Member Limited Liability Companies Classified as Partnerships for Tax Purposes, Cal. FTB (10/19/18). In light of a 2017 California Court of Appeal published decision which held that an out-of-state corporation was not doing business in California within the meaning of Cal. Rev. & Tax Code Section (Section 23101) when the corporation s only connection to California was its passive ownership of a 0.2 percent membership interest in a California-based manager-managed limited liability company (LLC) [see previously issued Multistate Tax Alert for more details on this decision], the California Franchise Tax Board (FTB) has issued a new legal ruling (Legal Ruling ) intended to modify Legal Ruling that sets forth the FTB s analysis on a number of doing business scenarios involving members of multiple-member LLCs that are classified as partnerships for tax purposes. The modification relates to the distinction between manager-managed LLCs and member-managed LLCs and provides that a narrow exception may apply in limited circumstances to the general rule that if an LLC classified as a partnership for tax purposes is doing business in California under Section 23101, the members of the LLC are themselves generally considered to be doing business in California. Please contact us with any questions. URL: State Tax Matters Page 2 of 6 Copyright 2018 Deloitte Development LLC

3 URL: Christopher Campbell (Los Angeles) Principal Keith Gray (San Francisco) Steve West (Los Angeles) Shirley Wei (Los Angeles) Ohio DOT Explains New Law Updating State Conformity to IRC, Specifically Election to Follow Prior Version of IRC Taxation Conformity Updates, Ohio Dept. of Tax. (10/16/18). The Ohio Department of Taxation (Department) has issued guidance explaining legislation enacted earlier this year [S.B. 22; see State Tax Matters, Issue , for more details on this new law] that generally incorporates into Ohio s corporate and individual income tax laws those Internal Revenue Code (IRC) changes made since March 30, 2017, and permits a taxpayer whose taxable year ends after that date, but before the effective date of these incorporated changes (i.e., before March 30, 2018), to elect to apply the IRC as it existed for that taxable year. More specifically, the guidance explains that such qualifying Ohio taxpayers must elect use of one version of the IRC or the other, and that these taxpayers cannot selectively incorporate some provisions from each version of the IRC. The Department generally explains that it will presume a taxpayer election to conform with the most current version of the IRC (i.e., as of the March 30, 2018 effective date) unless an affirmative election otherwise has been made. Please contact us with any questions. URL: URL: URL: Dave Adler (Columbus) daadler@deloitte.com Courtney Clark (Columbus) courtneyclark@deloitte.com Pennsylvania Ruling Holds that Taxpayer s Satellite TV Services and Leased Property Must be Sourced Based on Customer Location Case No , Penn. Bd. of Fin. & Rev. (5/14/18). The Pennsylvania Board of Finance and Revenue (Board) held that, under prior law, a company in the business of satellite television broadcasting had to include receipts from sales of its broadcast satellite television services based on the location of its subscribers for purposes of computing its sales factor numerator under the state corporate net income tax, as the company failed to show that a greater proportion of its income-producing activity on the Pennsylvania subscriber sales occurred outside of Pennsylvania based on costs of performance. Similarly, the company was also required to include its underlying satellite equipment leased to customers in the numerator of its property factor based on the location of subscribers. In doing so, the Board reasoned that the company s uplink satellite equipment and satellite-based transponders constituted costs of providing its satellite television services for sale. The Board also reasoned that the cost of receiving equipment leased to Pennsylvania customers and the cost of maintaining Pennsylvania service locations were part of the income-producing activities related to its Pennsylvania sales. URL: %20DISH%20DBS%20CORPORATION_Redacted.pdf State Tax Matters Page 3 of 6 Copyright 2018 Deloitte Development LLC

4 Note that subsequently enacted legislation in Pennsylvania revised state law to incorporate market-based sourcing rules, as well as special apportionment provisions applicable to satellite television service providers. Please contact us with any questions. Kenn Stoops (Philadelphia) Stacy Ip-Mo (Philadelphia) South Carolina DOR Explains New Law Updating State Conformity to IRC, Including Decoupling from Various Provisions of the TCJA Information Letter No. IL 18-15, S.C. Dept. of Rev. (10/16/18). The South Carolina Department of Revenue has issued summary guidance in light of recently enacted legislation [H.B. 5341; see State Tax Matters, Issue , for more details on this new law] that generally updates state corporate and personal income tax statutory references to the Internal Revenue Code (IRC), referring to the federal law in effect as amended through February 9, 2018, but which also decouples from various provisions of the federal Tax Cuts and Jobs Act (i.e., P.L ), including IRC Sec. 163(j) relating to limitation on business interest expense, IRC Secs. Sections 250 and 267A relating to the taxation of foreign income, and IRC Sec. 199A relating to qualified business income. The summary also clarifies that while not specifically addressed in this new law, South Carolina law had previously decoupled from, and going forward will continue to decouple from, IRC Secs. 944 through 989 relating to the taxation of foreign income including IRC Sec. 951A regarding global intangible low-taxed income (GILTI) and IRC Sec. 965 s repatriation tax under the federal Tax Cuts and Jobs Act. Please contact us with any questions. URL: URL: URL: John Galloway (Charlotte) Partner jgalloway@deloitte.com Art Tilley (Charlotte) atilley@deloitte.com Meredith Morgan (Charlotte) mmorgan@deloitte.com Sales/Use/Indirect: Rhode Island DOT Affirms that, Based on Pre-Wayfair Doctrines, Online Retailer Does Not Have Substantial Nexus through In-State Retail Affiliate Admin. Hearing Dec. No. 13-T-0173, R.I. Div. of Tax n (10/12/18). In a ruling involving an out-of-state remote seller that sold its retail products to customers nationwide (including customers in Rhode Island) via catalogue and internet, the Tax Administrator of the Rhode Island Division of Taxation (Division) recently affirmed a hearing officer s pre- Wayfair ruling that such seller did not have substantial nexus with Rhode Island for state sales and use tax purposes. In doing so, the Tax Administrator agreed that the remote seller s in-state retail sister affiliate did not perform activities on the remote seller s behalf that were significantly associated with the remote seller s ability to establish and maintain an in-state market for its sales. The taxpayer had argued that the auditor had been trying to make the remote seller collect Rhode Island sales tax based solely on the in-state presence of its affiliate s retail store. The taxpayer had argued that the two were separate companies which sold products to Rhode Island customers through different sales channels, and that citing Quill and Tyler Pipe which require physical presence or third-party activity to establish and maintain an in-state market the in-state store did not engage in such activities on the remote seller s behalf. The taxpayer apparently claimed that nexus cannot be created by perception that the companies are related State Tax Matters Page 4 of 6 Copyright 2018 Deloitte Development LLC

5 but must be created by in-state activities conducted on behalf of the out of state entity. Note that the hearing officer s original decision in this case occurred prior to the U.S. Supreme Court s decision in Wayfair, and the Wayfair case was not mentioned in the Tax Administrator s recent affirmation of the hearing officer s original decision. Please contact us with any questions. URL: Jack Lutz (Hartford) jacklutz@deloitte.com Inna Volfson (Boston) ivolfson@deloitte.com Sales/Use/Indirect: Texas Comptroller Issues Proposed Post-Wayfair Remote Seller Nexus Rules with October 1, 2019 Implementation Date, and $500,000 Safe Harbor Proposed Amended 34 Tex. Admin. Code Section 3.286, Tex. Cmptrlr. (10/19/18). As indicated shortly after the Wayfair decision [see State Tax Matters, Issue , for more details about previous references to forthcoming Texas administrative rules involving remote seller nexus], the Texas Comptroller (Comptroller) recently released proposed administrative rule amendments in response to the U.S. Supreme Court s decision overruling Quill s physical presence nexus standard [see previously issued Multistate Tax Alert for more details on the Wayfair case]. In doing so, the Comptroller explains that these proposed amendments would restore state sales tax permit and collection requirements that were unconstitutional prior to the Wayfair decision, as well as establish a nexus safe harbor for remote sellers whose total Texas revenue in the preceding twelve calendar months is less than $500,000. As proposed, these amendments would postpone the new Texas permitting and collection requirements for remote sellers until October 1, 2019, to provide additional time for remote sellers to prepare for their collection and reporting obligations. Comments on this proposal must be received no later than 30 days from the proposal s October 19, 2018 publication date in the Texas Register (i.e., no later than November 18, 2018). Please contact us with any questions. URL: URL: URL: Robert Topp (Houston) rtopp@deloitte.com Michael Bryan (Philadelphia) mibryan@deloitte.com Rick Heller (Parsippany) rickheller@deloitte.com Robin Robinson (Austin) rorobinson@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 5 of 6 Copyright 2018 Deloitte Development LLC

6 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 6 of 6 Copyright 2018 Deloitte Development LLC