Current Developments in State and Local Tax

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1 MARY F. BERNARD, CPA, CMI, is a Director in the State Income and Franchise Tax practice in the Providence, Rhode Island office of Ryan, LLC. MARK L. NACHBAR, Esq., CPA, is a Principal in the State Income and Franchise Tax practice in the Los Angeles, California office of Ryan, LLC. Current Developments in State and Local Tax Recent Decisions and Developments in the Courts and Departments of Revenue By Mary F. Bernard and Mark L. Nachbar Louisiana Credit for Taxes Paid to Other States Ruled Unconstitutional On December 5, 2018, the Louisiana Supreme Court ( Court ) affirmed a lower court judgment declaring H.B. 402 (Act 109, 2015 Regular Session) unconstitutional for disallowing an income tax credit to Louisiana business owners for taxes they paid in other states. Louisiana has historically provided residents a full credit against their Louisiana income tax liability for taxes paid to other states on income derived in those states. Under the Act, however, the availability of the credit was limited to only those taxes paid to a state with a reciprocal credit. In Ivan I. Smith v. Louisiana Department of Revenue, two Louisiana residents owned interests in multiple LLCs and S corporations that conducted business in both Louisiana and Texas. The taxpayers paid Texas margin tax at the entity level on the Texas-sourced income of the respective entities and subsequently claimed a credit for the taxes paid to Texas on their 2015 Louisiana resident income tax returns. Because Texas does not levy an income tax, and thus has no reciprocal credit to provide, the credits were denied. The Court reviewed the structure of the Texas margin tax, as well as prior Louisiana and U.S. Supreme Court jurisprudence, and found that the margin taxes paid to Texas were income taxes paid to another state for purposes of the Louisiana tax credit. The Court further held that Act 109 results in Louisiana residents who earn interstate income being taxed twice on all or a portion of their interstate income, thus violating the dormant Commerce Clause of the U.S. Constitution. SPRING CCH INCORPORATED AND ITS AFFILIATES. ALL RIGHTS RESERVED. 5

2 CURRENT DEVELOPMENTS IN STATE AND LOCAL TAX Maryland Tax Court Affirms Taxation of Nonresident Parent Company After an audit of Manpower Inc. s Maryland operating entities, the Maryland Comptroller s office issued a Notice of Assessment to the parent company, which had not filed corporate tax returns in Maryland. With corporate headquarters in Wisconsin, the parent company initially contested Maryland s jurisdiction to tax the nonresident parent but subsequently filed corporate tax returns for the years under audit. Manpower, Inc. calculated its Maryland taxable income using an alternative apportionment method allowed by statute in lieu of the standard three-factor apportionment method. The amount derived by this formula was less than the royalties that the Maryland entities paid to the parent. The Comptroller s office also used an alternative apportionment methodology that has been approved by the Maryland courts. That formula starts with the royalties received by the parent from the Maryland operations. Manpower, Inc. challenged the usage of the nontraditional apportionment method for determining the proper Maryland-related income-producing activities. The Comptroller s office focused on the fact that Manpower, Inc. was the owner of the intellectual property and received royalty payments from its Maryland operating companies for the usage of the Manpower System. Manpower, Inc. owned sufficient voting stock in the operational entities to control the companies policies and management. Corporate oversight was provided to all entities through the implementation of strategies and licensing agreements for the Manpower System. In return, the Maryland operating entities paid Manpower, Inc. a royalty fee based on the percentage of sales. The Comptroller s office calculated the Manpower, Inc. assessment using the same apportionment formula approved in Gore Enter. Holdings, Inc. v. Comptroller of the Treasury 1 and by the Tax Court in Conagra Brands, Inc., et al. v. Comptroller and Staples, Inc., et al. v. Comptroller. 2 Manpower, Inc. contended that the Comptroller was required to follow the statute and regulations, which dictated the appropriate apportionment methods to use on assessments. However, as held by the cases cited above, the Tax Court agreed with the Comptroller in stating that the Court could look to the realities of the relationship between companies to fairly determine the amount of income that is traceable to Maryland. The Comptroller was not limited to statutorily or regulatory apportionment formulas when this would yield an apportionment factor that does not fairly represent the taxpayer s activities in Maryland. Once again, the Tax Court affirmed the state s ability to tax the income of a nonresident parent company by applying alternative apportionment. New Jersey Details New Combined Reporting Nexus Policy The release of New Jersey Technical Bulletin 86 3 clarifies the nexus policy to be followed in the state s new combined reporting regime, effective for privilege periods ending on or after July 31, Each member that has nexus with New Jersey is subject to the $2,000 minimum tax. If one member in the combined group has nexus and sufficient activities in New Jersey to be taxed based on income, no member that has nexus with the state may claim P.L protection. This policy appears to violate the intent of P.L , which prohibits a state from imposing an income tax on an entity whose only activities in the state involve solicitation of tangible personal property. This will result in the New Jersey sales of a member that was immune from the Corporation Business Tax under separate reporting rules now being included in the numerator of the sales fraction used to apportion income of the combined group. Business entities that are disregarded for federal purposes will also be treated as disregarded for purposes of the New Jersey Corporation Business Tax. The tax attributes of the disregarded entity are reported by the member of the combined group that owns the entity. The disregarded entity is not subject to the $2,000 minimum tax. In addition, New Jersey S Corporations that do not elect inclusion in the combined group will be required to pay the minimum tax if they are part of an affiliated or controlled group that has a total payroll of $5,000,000 or more. When Is Leasing Really Selling for Texas Franchise Tax Purposes? On December 19, 2018, the 201st District Court of Travis County Texas (the District Court ) issued a Final Judgment in Xerox Corporation v. Hegar, 4 granting refund to the taxpayer and denying the Comptroller s counterclaim. On its originally filed 2008 and 2009 franchise tax reports, Xerox Corporation ( Xerox ) had used the 0.5% rate to compute its franchise tax under Tex. Tax Code (b). The Comptroller, as part of a desk audit, denied the use of the lower rate. Upon appeal to the District Court, the Comptroller also filed a counterclaim 6 JOURNAL OF STATE TAXATION SPRING 2019

3 asserting the taxpayer overstated its cost of goods sold (COGS) and should have computed taxable margin as 70% of its total revenue. To qualify for the lower rate, a taxpayer must be primarily engaged in a wholesale or retail trade and cannot produce more than 50% of its wholesale or retail trade products. Wholesale trade is defined in Tex. Tax Code (18) by reference to Division F of the 1987 Standard Industrial Classification (SIC) Manual. The Comptroller asserted that Xerox s activities were described by Division D Manufacturing and Division I Services. Xerox presented evidence regarding its sales-type leases, which were used to sell its equipment. To constitute a sale, the leases had to satisfy criteria regarding the length of the lease in relation to the life of the equipment, and the total of the lease payments in relation to the market value of the equipment. Xerox also presented many other facts regarding its sales and production activities. The Court of Appeals has opined in a substantially similar case, Rent-A- Center v. Hegar, 5 involving merchandise transferred to its customers through the use of rental agreements. Despite the use of rental agreements, the Court determined that Rent-A-Center was primarily engaged in selling merchandise. The Court disagreed with the Comptroller that the relevant question was whether its sales exceeded its revenues from leases, and determined its activities were more like selling than leasing. Thus, entities using rental/ lease agreements may be primarily engaged in a wholesale or retail trade, depending on the activities generating the majority of their revenues. The District Court also denied the Comptroller s counterclaim that Xerox s COGS were overstated because the Comptroller was not able to support its claim. It is unknown whether the Comptroller will appeal the District Court determination in Xerox Corp. v. Hegar. No petition was filed in Rent-A-Center v. Hegar, which was remanded to determine the amounts due to the taxpayer. California Clarifies Definition of a Financial Corporation The California Franchise Tax Board (FTB) addressed the issue of mortgage servicing contracts and hedging in a recent Chief Counsel Ruling. 6 Guidance was requested as to whether income derived from mortgage servicing contracts and interest rate hedging contracts constitutes income from dealings in money or moneyed capital for purposes of California Code of Regulation Section Section defines a financial corporation as a corporation that derives more than 50% of its total gross income from dealings in money or moneyed capital in substantial competition with the business of national banks. Examples listed in the section fall into two categories: legal tender (cash, coin, and currency) and instruments evidencing debt obligations (mortgages, deeds of trust, conditional sales contract, loans, commercial paper, installment notes, credit cards, and accounts receivable). The taxpayer in the ruling is a specialty financial services company focusing on originating, purchasing, selling, and servicing residential mortgage loans. Based on gross income generated, the predominant business activity has been servicing mortgage loans. In addition, the taxpayer enters into hedging contracts to mitigate the risk created by fluctuating interest rates. The FTB held that the taxpayer was not a financial corporation because more than 50% of its total gross revenue was derived from servicing mortgage loans, which does not constitute dealings in money or moneyed capital. Originating and selling mortgages would qualify as dealings in money or moneyed capital, but servicing loans would not. Similarly, interest rate hedging contracts do not qualify as actual legal tender or instruments evidencing debt. This results in predominantly all income to be classified as nonfinancial for purposes of Section California Revises Doing Business Standard After Swart California FTB issued Legal Ruling to revise its policy on when multiple member LLCs are considered doing business in California. The former legal ruling on the topic from 2014 concluded that if an LLC classified as a partnership for tax purposes is doing business in California, the members of the LLC are doing business in California as well. There was no distinction made between management by a member versus a nonmember. In 2017, a California court of appeal ruled in Swart 7 that a corporate taxpayer was not doing business in California based on its passive 0.2% interest in a manager-managed LLC doing business in California. The FTB did not appeal this ruling and indicated that it would follow the decision with similar facts. Legal Ruling modifies the previous ruling to state that if an LLC classified as a partnership for tax purposes is doing business in California, the members of the LLC are generally considered to be doing business in California. The ruling provides a narrow exception in limited circumstances to incorporate the Swart case results, when the partnership interest percentage is relatively small. SPRING CCH INCORPORATED AND ITS AFFILIATES. ALL RIGHTS RESERVED. 7

4 CURRENT DEVELOPMENTS IN STATE AND LOCAL TAX New York Tax on the Opioid Industry Struck Down in Federal Court The U.S. District Court for the Southern District of New York declared the recently enacted Opioid Stewardship Act ( the Act ) unconstitutional. 8 The Act, which became effective in July 2018, embodied the state s attempt to combat the opioid crisis by enacting an annual assessment against pharmaceutical manufacturers and distributors licensed to distribute opioids in New York. The assessment is spread out over a six-year period and is calculated based on the prior year s sales. Healthcare Distribution Alliance filed a complaint seeking a declaratory judgment that the Act was unconstitutional and a permanent injunction prohibiting its implementation. Two other plaintiffs also challenged the pass-through prohibition. The Act forbids opioid manufacturers and distributors from passing on new costs imposed under the Act to downstream purchasers of their products. The court held that the method by which the Act extracts payments from opioid manufacturers and distributors to redress those concerns violates the Dormant Commerce Clause of the United States Constitution. The court further held that the payment is a regulatory penalty on manufacturers and distributors, which improperly burdens interstate commerce. The court held that the Act would have the effect of discriminating between purchasers of opioids in New York and those outside that state, as any additional charge could be passed through to manufacturers and distributers that are not present in New York. The court granted the preliminary judgment and held that the Act is unconstitutional. As the first payments due on the assessment are scheduled for January 2019, the timing of the decision leaves the state time to file an appeal before payments are due. As of this writing, no appeal has been filed. Wayfair Update In response to the U.S. Supreme Court ruling in South Dakota v. Wayfair 9 issued in June 2018, states continue to react to the demise of the physical presence test originally established in Quill 10 in Wayfair opened the floodgates with a rush to establish minimum thresholds to require sales tax withholding on remote sellers. On October 31, 2018, South Dakota Governor Daugaard announced that the state had entered into a settlement agreement with the three litigants, Wayfair, Overstock, and Newegg, after the case had been remanded to state court by the U.S. Supreme Court. Under the agreement, the litigants will comply with the state s economic nexus law beginning January 1, The settlement also removed the injunction that prevented the state from requiring the Wayfair litigants to comply with the law and brought a conclusion to all remaining issues not addressed by the Supreme Court. By the end of the first quarter of 2019, almost all states imposing a sales tax will have proposed or implemented changes to statutes necessary to expand their reach to remote sellers who exceed certain thresholds of sales into their state. In some cases, only administrative guidance has been issued by a state, which may not have sufficient authority if it conflicts with the current statutes. The next wave of states with effective dates this quarter will bring the total number of states with economic nexus standards for sales tax to 34. California will become the 35th state with economic nexus standards on April Fool s Day. U.S. Supreme Court to Hear Trust Due Process Case In a move that places another nexus case before the highest court, the U.S. Supreme Court granted certiorari in North Carolina Department of Revenue v. The Kimberley Rice Kaestner 1992 Family Trust. 11 The issue to address is whether taxation of a trust based solely on the residence of the beneficiary violates the Due Process Clause. The Kaestner case involved a New York trust with assets located in Massachusetts and the trustee residing in Connecticut. No distributions were made by the trust to the beneficiary who resided in North Carolina during the years at issue. Trust income is generally taxable either to the trust if the income stays in the trust or to the beneficiary if the income is distributed to them. There is no question that the trust distributions are taxable to the beneficiary in their state of residence. The North Carolina statute taxed the undistributed income of the out-of-state trust based solely on the residence of the beneficiary. The North Carolina Court of Appeals found that the trust did not maintain any physical presence in the state and had never held assets located in the state, with its only connection to the state being the residence of the beneficiary. The Court determined, and the North Carolina Supreme Court agreed, that the statute allowing taxation based only on the residence of the beneficiary violated the Due Process Clause. The Department of Revenue sought review by the U.S. Supreme Court, citing that various states have addressed this issue with differing results from the courts. The decision could be far-reaching, as currently 11 states tax trusts 8 JOURNAL OF STATE TAXATION SPRING 2019

5 based on the residency of the beneficiaries. Minnesota Department of Revenue has also requested review of a similar trust case, William Fielding, et al. v. Commissioner of Revenue. 12 Quick Takes Texas Sale of SMLLC Interest Is Sale of an Intangible In private letter ruling No L issued by the Texas Comptroller, guidance was provided for the treatment of the proceeds of a sale of a single member limited liability company (SMLLC). For purposes of the Texas franchise tax, the sale of the membership interest was treated as an intangible asset, not a sale of the underlying assets. This treatment caused the revenue from the sale to be sourced to the location of the payor, not the location of the assets. The Comptroller explained that the SMLLC is treated as a taxable entity for purposes of the Texas franchise tax, regardless of whether the LLC is disregarded for federal purposes. Illinois Expands Definitions Regarding Transportation Company Apportionment Formula Illinois Department of Revenue issued new Section to 86 Adm. Code to provide a definition of transportation company for purposes of the apportionment formula applicable to taxpayers providing transportation services. A transportation company is defined as one deriving 80% or more of its gross income, averaged over a period of three years, which includes the current tax year and the immediately preceding two tax years, from furnishing transportation services and ancillary services. Transportation services include the following: Movement of freight or passengers by air, land or water; Movement of liquid or gaseous substances by pipeline; and Intermodal services movement of freight by more than one form of carrier during a single movement without handling the freight itself during the change of modes. Ancillary services include the following: Freight packaging, packing, and warehousing; Airline baggage and reservation services; and In-transit sale of food and beverages to passengers; In-flight rentals of pillows, blankets, or headsets; Truck and driver leasing arrangements. Indiana Sale of Cloud Services Not Subject to Sales and Use Tax As of July 1, 2018, prewritten computer software sold, rented, leased or licensed for consideration that is remotely accessed over the Internet is not considered an electronic transfer of computer software and is not considered a retail transaction for purposes of sales and use tax in Indiana. Commissioner s Directive #41 was issued to achieve compliance with the Streamlined Sales and Use Tax Agreement, of which Indiana is a signatory. The Indiana Department of Revenue will only impose sales and use tax on products transferred electronically if the products meet the definition of specified digital products, prewritten computer software, or telecommunication services. The distinction is made that if the software does not require downloading to be used by the customer, a purchase of the right to use a product is not a retail transaction. Colorado Grace Period Provided for New Sales and Use Tax Rules New sales and use tax rules went into effect on December 1, 2018, requiring businesses to impose sales and use tax based on the tax rate in effect at the destination of the customer. The Colorado Department of Revenue explained: If a retailer delivers taxable goods to a customer s address, which is outside the jurisdiction of the retailer, sales tax must now be collected at the rate effective for the customer s address, not the tax rates that are in common between the customer s address and the seller s location, as was the case previously. In addition to this change, economic nexus rules went into effect on December 1, 2018, requiring remote sellers to collect and remit sales tax if they meet either of the following: $100,000 or more in gross sales or services delivered in Colorado; or 200 or more transactions selling tangible personal property or services delivered in Colorado. There is a grace period through May 31, 2019, to comply with these changes to ensure both in-state and out-of-state retailers have sufficient time to make the required system changes. In-state businesses will be granted a waiver from compliance with the destination-sourcing changes automatically until then. However, an out-of-state retailer that does not collect sales tax during this grace period must still comply with Colorado s reporting statute: C.R.S (3.5). That statute requires non-collecting retailers to provide certain notices to individual Colorado customers and the SPRING CCH INCORPORATED AND ITS AFFILIATES. ALL RIGHTS RESERVED. 9

6 CURRENT DEVELOPMENTS IN STATE AND LOCAL TAX Department regarding purchases where the retailer did not collect the tax. The reporting requirements for retailers that do not collect tax during the grace period will be strictly enforced. Idaho Very Broad Nexus Standard Applied to California Company with One Coding Employee The Idaho State Tax Commission (STC) determined that a California Internet service provider had nexus in Idaho based on the services of one employee in the state who wrote computer code for the company s internal systems. The company argued that the employee had no contact with customers and did not engage in solicitation. The employee did not establish or enhance a market for the company s services and provides no activities directly related to the company s commercial business. Transacting business in Idaho is determined by the presence of either one of two concepts: (1) The corporation owns or leases any property located in Idaho, for the purpose of, or resulting in, economic or pecuniary gain or profit; or (2) The corporation engages in or transacts any activity in Idaho for the purpose of, or resulting in, economic or pecuniary gain or profit. The STC found that the company had nexus for purposes of income tax due to the presence of one employee using one computer owned by the company. Wisconsin Enacts Elective Passthrough Entity Tax Wisconsin has enacted an elective passthrough entity (PTE) tax to allow the individual level tax on passthrough income to be paid at the entity level. S.B. 883 (2017 Wisconsin Act 368) allows partnerships, limited liability companies taxed as partnerships, and S corporations to elect to pay the state income tax on behalf of its individual owners. The election is effective for S corporations for tax years beginning on or after January 1, 2018, and for all other PTEs for taxable years beginning with the 2019 tax year. All owners of more than 50% of the capital and profits of partnerships or LLCs must consent to the election. Owners of 50% or more of the shares of the S corporation must similarly consent to the election. The election must be made annually on or before the due date or the extended due date of the PTE s return for each taxable year. With a timely made election, the PTE is taxed at a rate of 7.9%, rather than at the highest individual tax rate of 7.65%. Tax credits available to the owners cannot be used to offset the entity level tax. The only tax credits that will be allowed to the PTE will be net income or franchise taxes paid by the PTE to other states. Other than for income taxed by states that border Wisconsin, the entity s credit for taxes paid cannot exceed an amount equal to 7.9% multiplied by the income subject to tax in another state that is also subject to tax in Wisconsin. Q4 State Tax Updates to the Tax Cuts and Jobs Act of 2017 Arkansas In a letter ruling 13 issued October 2, 2018, the Arkansas Department of Finance and Administration stated that the state does not conform to Code Sec Arkansas will only tax dividends actually paid to a taxpayer. Georgia On December 7, 2018, the Georgia Department of Revenue adopted regulations 14 that limit the amount of a net operating loss (NOL) that can be carried forward to offset taxable income to 80% of the tax. In addition, the newly adopted regulations confirm that only C Corporations can exclude foreign income and only the net amount after the Code Sec. 965(c) deduction is eligible for the exclusion. Iowa Iowa enacted a comprehensive tax reform bill earlier in the year, which included adopting much of the Tax Cuts and Jobs Act (TCJA) of In October, the Iowa Department of Revenue issued guidance with respect to several areas contained in its new law. The Department has confirmed that for tax year 2017, deemed repatriations under Code Sec. 965 should not be included in Iowa taxable income. Any additions or subtractions made for federal tax purposes should be eliminated for Iowa purposes. Secondly, the Department has confirmed that for tax year 2018, Iowa will continue to allow taxpayers to take a domestic production activities deduction (DPAD), under Code Sec. 199, despite its repeal for federal purposes. However, the deduction will not be available for years beginning on or after January 1, In addition, Iowa did not repeal the deferral of gain recognition under Code Sec for years prior to January 1, Louisiana The Louisiana Department of Revenue has issued a bulletin 15 that Code Sec. 965 repatriated income will be 10 JOURNAL OF STATE TAXATION SPRING 2019

7 considered Subpart F dividend income. It will be eligible for a deduction as a dividend received equal to 72% of the dividend that would otherwise be included in gross income. Maine An alert was issued in October 16 providing guidance for deemed repatriated income under Code Sec In the alert, the Department of Revenue indicates that the income is subject to tax in Maine less the 80% deduction allowed. In addition, the income may not be included in any Maine apportionment factor. Maryland The Maryland Comptroller issued guidance 17 on the inclusion of Code Sec. 965 income in the Maryland tax return. The Alert states that because Maryland has not decoupled from the provision, the income should be included in a taxpayer s calculation of its Maryland tax liability. However, if the taxpayer owns 50% or more of the foreign payor, it may take a deduction for dividends received. Also, the Comptroller notes that if inclusion of the income in the apportionment factor results in distortion, the taxpayer may petition the Comptroller for an alternative apportionment method. Massachusetts On November 30, 2018, the Massachusetts Department of Revenue amended its regulation concerning the classification of manufacturing corporations. 18 The amendments make clear that Code Sec. 965 income or any income attributed to the GILTI provisions may not be included in the calculation to determine if a corporation meets the definition of a manufacturing corporation. In an earlier release, 19 the Department also confirmed that while the state will recognize Code Sec. 965 income, the income will be treated as a dividend, subject the 95% dividend received deduction. Also, on October 23, 2018, Massachusetts Governor Baker signed legislation 20 that effectively decouples from the new GILTI provisions. Under the new law, the GILTI income will be considered dividend income and will be subject to the 95% dividends received deduction. Michigan As a parting gesture, outgoing Governor Snyder vetoed legislation 21 that would have decoupled the state from the interest deduction limitation contained in Code Sec. 163(j). The law will require reintroduction in Missouri Guidance was issued by the Missouri Department of Revenue on December 1, 2018, 22 regarding Code Sec. 965 income. The DOR stated that the income must be included in a taxpayer s federal taxable income. Based on each taxpayer s facts and circumstances, the income may be classified as business or nonbusiness income. The Department also notes that the income should be included in the sales factor to the extent it constitutes a sale. In addition, because the income will be considered Subpart F income for federal tax purposes, it may be deducted under Missouri s dividend received provision. Montana The Department of Revenue in Montana also issued guidance on the treatment of Code Sec. 965 income. 23 The DOR explained that the income should be included as an addition modification and then 80% should be taken as another reduction. If any of the income included as an addition modification was from a member of the Montana water s edge group, such as a tax haven jurisdiction, that income should be subtracted in full. Nebraska Another state issuing guidance on Code Sec. 965 income is Nebraska. 24 The Department stated that taxpayers are required to include Code Sec. 965 in their computation of taxable income. The Department will not consider the Code Sec. 965 inclusion to be a foreign dividend. If the taxpayer believes that the income should be treated as a foreign dividend, subject to a dividend exclusion, it must support the deduction with a legal analysis supporting the treatment of the foreign income as a dividend under the Code and related Treasury Regulations. New Jersey In October, New Jersey enacted a new tax law 25 that conforms to both the Foreign Derived Intangible Income (FDII) deduction under Code Sec. 250, and GILTI income inclusion under Code Sec. 951A. The law also reduced the dividends received deduction from 100% to 95%, and delineated special rules for including the remaining 5% in a taxpayer s taxable income. The Department of Revenue also issued guidance 26 in December, which provides for the sourcing of FDII and GILTI to New Jersey. Taxpayers are required to use a separate special accounting method to source the income and deductions. The method calls for determining the ratio of New Jersey s gross domestic product (GDP) to the GDP of all states in which the taxpayer has economic nexus. SPRING CCH INCORPORATED AND ITS AFFILIATES. ALL RIGHTS RESERVED. 11

8 CURRENT DEVELOPMENTS IN STATE AND LOCAL TAX The Department has also provided guidance 27 and a special form 28 for the inclusion of Code Sec. 965 income. Under the reduced dividend received deduction, taxpayers will need to report 5% of their Code Sec. 965 income in the year in which they include the income in their federal taxable income calculation. As the inclusion affects tax years ending in 2017, businesses must amend their 2017 Form CBT-100. Taxpayers are encouraged to file Form CBT-DIV 2017 Supplemental for the 2017 fiscal year but aren t required to use it if their fiscal year began on or after August 1, 2017, and ended on or after July 31, New York New York provided guidance to the apportionment of GILTI income in the instructions 29 to its tax forms. The GILTI income is to be included in the everywhere column but not in the New York column. The state also enacted budget legislation 30 that treats Code Sec. 965 income as exempt Controlled Foreign Corporation (CFC) income but requires the addback of expenses associated with such income. The state also issued guidance 31 reiterating this provision, as well as instructing taxpayers to report the income in Oklahoma The Oklahoma Tax Commission issued an informal announcement 32 and has issued proposed regulations 33 to clarify the treatment of Code Sec. 965 and GILTI income. Both of these items will be taxed by the state of Oklahoma as dividends. These dividends are to be allocated to the domiciliary situs of the receiving taxpayer. Oregon Guidance has also been issued by the Oregon Department of Revenue 34 regarding the inclusion of Code Sec. 965 income in a taxpayer s sales factor. For years beginning before January 1, 2018, the income must be excluded from the sales factor, unless the gross receipts are derived from the taxpayer s primary business activity. In years beginning after January 1, 2018, the income must be excluded from the taxpayer s apportionment factor, with no exceptions. South Carolina South Carolina updated its laws to conform to the TCJA on October 3, However, the state has decoupled from the interest limitation rules contained in Code Sec. 163(j), the NOL carryback changes under Code Sec. 172(b)(1) and the inclusion of governmental incentives under Code Sec. 118(b)(2). ENDNOTES 1 Gore Enter. Holdings, Inc. v. Comptroller of the Treasury, 437 Md. 492 (Md. Mar. 24, 2014). 2 Conagra Brands, Inc., et al. v. Comptroller, 2015 WL (Md. Tax Ct. 2015) and Staples, Inc., et al. v. Comptroller, 2015 WL (Md. Tax Ct. 2015). 3 New Jersey, Division of Taxation, Technical Bulletin 86, Included and Excluded Business Entities in a Combined Group and the Minimum Tax of a Taxpayer That Is a Member of a Combined Group (Issued Jan. 3, 2019). 4 Xerox Corporation v. Hegar, Docket Number D-1-GN Rent-A-Center v. Hegar, 468 SW3d 220 (Tex. App. 2015, no pet.). 6 FTB Chief Counsel Ruling (Nov. 2, 2018). 7 Swart Enterprises, Inc. v. Franchise Tax Board, 7 Cal.App.5th 497 (2017). 8 Healthcare Distribution Alliance v. Zucker, FSupp3d, 2018 WL (S.D.N.Y. Dec. 19, 2018). 9 South Dakota v. Wayfair, SCt, 585 US 138 SCt 2080; 201 LEd2d Quill Corp. v. North Dakota, SCt, 504 US 298, 112 SCt 1904 (1992). 11 North Carolina Department of Revenue v. The Kimberley Rice Kaestner 1992 Family Trust, 814 SE2d 43 (N.C. 2018). 12 William Fielding, et al. v. Commissioner of Revenue, 916 NW2d 323 (Minn. 2018). 13 Ark. Dep t of Fin. & Admin., Opinion No (Oct. 2, 2018). 14 Ga. Dep t of Revenue, Reg et al. 15 La. Dep t of Revenue, Revenue Info. Bull (Oct. 8, 2018). 16 Me. Revenue Servs., Tax Alert 11 (Oct. 1, 2018). 17 Md. Comptroller of the Treasury, Tax Alert (Oct. 5, 2018). 18 Mass. Dep t of Revenue, Reg (Nov. 30, 2018), Mass. Reg. 19 TIR (Oct. 4, 2018). 20 H S.B Mo. Dep t of Revenue, Policy Guidance Tax Cuts and Jobs Act (Dec. 1, 2018). 23 Mont. Dep t of Revenue, Montana Corporate Income Tax Treatment of IRC Section 965(A) Income (Nov. 13, 2018). 24 Neb. Dep t of Revenue, Income Tax GIL (Dec. 21, 2018). 25 A. 4495, enacted October 4, N.J. Div. of Tax n, TB-85(R) (Dec. 21, 2018). 27 N.J. Div. of Tax n, Guidance for Reporting IRC Section 965 Income Retroactive to 2017 (Oct. 16, 2018). 28 N.J. Div. of Tax n, NEW Form CBT-DIV 2017 Supplemental Used in Lieu of CBT-DIV 2017 (Dec. 31, 2018). 29 Instructions to Franchise Tax Form CT-3 and CT-3-A. 30 S.B Notice N-18-7, August Okla. Tax Comm n, Information related to IRC 965 and IRC 951A Income (Oct. 8, 2018). 33 Section 710: Or. Dep t of Revenue, Revenue Bull (Nov. 9, 2018). 35 H.B. 5341, enacted October 3, JOURNAL OF STATE TAXATION SPRING 2019

9 This article is reprinted with the publisher s permission from the Journal of State Taxation, a quarterly journal published by Wolters Kluwer. Copying or distribution without the publisher s permission is prohibited. To subscribe to the Journal of State Taxation or other Wolters Kluwer journals please call or visit CCHGroup.com. All views expressed in the articles and columns are those of the author and not necessarily those of Wolters Kluwer or any other person.