The WISS SALT Advisor – 4th Quarter 2009

Articles Within This Newsletter

NEW JERSEY

NJ Tax Amnesty - Results Are In

The state Treasury is estimating a total of $725 million from the tax amnesty program that ran through June 15th of this year, although the exact amount has not yet been determined. A deluge of receipts flooded in during the last several days of the program. Original estimates of the take were from $100 to $200 million. Funds are expected to be used for property tax relief. State officials have estimated that 56% of the funds were a result of corporate business tax, 23% were from sales and use tax, and 14% were from the personal gross income tax.

Rate for Composite Individual Returns

Although New Jersey requires that gross income tax be imposed at the highest rate on a composite return (NJ-1080C) filed by pass-through entities on behalf of their nonresident owners, the Division of Taxation is allowing the use of two rates in order to encourage nonresident individuals to elect to participate in a composite return. As a result of the 2009 increase of the personal income tax rate on high-income taxpayers, 2009 composite return filers may continue to apply the 6.37% rate for participating individuals with New Jersey sourced income of less than $250,000 each. However, the new highest rate of 10.75% is applied to participants with New Jersey sourced income of $250,000 or more.

Gambling Winnings/Losses

For tax years beginning after 2008, New Jersey lottery winnings from prize amounts exceeding $10,000 are taxable for New Jersey gross (personal) income tax purposes. The prize amount (over $10,000) is the determining factor of taxability, rather than the total amount of lottery winnings over the year. For example, if a person won the New Jersey lottery two times in the same year and the winning prize amounts were $5,000 and $6,000, these winnings are not subject to New Jersey gross tax. Losses from gambling incurred during the same period as the winnings may be used to offset winnings. Taxpayers may deduct all types of gambling losses, including those from playing the New Jersey lottery, from their total gambling winnings during the tax period, but such losses may not exceed the total of the winnings.

Corporate Income Tax: Limited Partner Investment Company Had Insufficient

The New Jersey Superior Court ruled that a limited partner investment company was not subject to the New Jersey corporation business tax (CBT) because it was found to have insufficient nexus with the state. Pursuant to the partnership agreement, the taxpayer limited partner did not have the right or the obligation to participate directly or indirectly in the active management of the limited partnership (LP); nor was it authorized to do or perform any act in the name of, or on behalf of, the LP. Also, the taxpayer had no place of business, employees, agents, representatives, or property in New Jersey. Furthermore, the taxpayer was not in the same line of business as the LP and was not unitary with the LP. Under N.J.A.C. 18:7-7.6, an out-of-state corporation that simply holds a limited partnership interest in an out-of-state New Jersey partnership and is not part of the unitary business of the partnership is not subject to the CBT.

The Division of Taxation also denied the taxpayer investment company status on the basis of N.J.A.C. 18:7-1.15, as amended after the tax year at issue, which eliminated the direct investment in a non-publicly traded pass-through entity from the definition of "qualified investment asset". The Tax Court held that the amendment to the regulation could not be applied retroactively, relying on the 2008 decision in Praxair Technology, Inc.,

However, on December 15, 2009, the New Jersey Supreme Court reversed the previously reported New Jersey Superior Court decision (dated December 16, 2008) relied on above, holding that a corporation that licensed its patents, trade secrets, and technologies to its parent corporation, which had facilities in New Jersey, had sufficient nexus with the state for the state to impose corporation business tax (CBT) on the income it earned from that activity in the 1994 to 1996 tax years, before retroactive application of a regulatory example.

Out of State Software Companies Found Not Subject to CBT

The activity of a computer software corporation that was domiciled out of state did not give rise to New Jersey corporation business tax (CBT) liability. AccuZIP, Inc., was a Nevada corporation with offices in California that sold prewritten software on CD-ROM to customers in New Jersey. AccuZIP solicited sales by placing advertisements in national trade magazines and maintaining a Web page. Customers placed orders for their products by telephone, e-mail, or fax with an employee in California. Furthermore, AccuZIP had no agents, officers, or employees in New Jersey, and its seat of management, offices, and other places of business were not located in New Jersey. The Tax Court determined that AccuZIP's activities in New Jersey were de minimis and were insufficient to create substantial nexus with New Jersey under the Commerce Clause because it was not doing business in the state.

The court rejected the Division of Taxation’s alternative nexus argument that the tax in dispute was fairly related to services that resulted in an economic benefit to the companies. Although the companies may have received a slight benefit from New Jersey's judicial system, that alone did not satisfy the substantial nexus requirement. Every corporation that sells a product in New Jersey is not subject to the CBT simply because it receives the benefit of New Jersey court protection.

NEW YORK STATE AND CITY

Taxpayer’s Advocate Appointed

The New York Department of Taxation and Finance has announced the appointment of Jack Trachtenberg as Taxpayer Rights Advocate, a newly created position within the department. Trachtenberg's duties will include advising taxpayers of their rights and responsibilities with respect to audits, protests, reviews of adverse decisions, collection activities, mediation services, and enforcement procedures. He also will be charged with identifying patterns in tax matters that may indicate systemic problems in department procedures or policies, and assisting the public with their tax problems when resolution has not been successful through normal department channels.

Extension Period Reduced for Partnership and Fiduciary Returns

A New York personal income tax regulation has been amended to generally provide for a five-month automatic extension period for partnership and fiduciary returns, applicable to returns for taxable years ending on or after December 31, 2009. Previously, a six-month extension period applied.

A six-month automatic extension is still available to electing large partnerships that are allowed an automatic six-month extension for federal purposes. In addition, the amended regulation provides that, the automatic extension may be granted for a different length of time to conform to extensions for comparable federal forms. The application for an automatic extension must be filed on or before the date prescribed for filing the appropriate return.

MCTMT Group Returns and Estimated Payments

The New York Department of Taxation and Finance has issued a memorandum discussing group estimated tax payments and group returns for partners under the metropolitan commuter transportation mobility tax (MCTMT). A partnership, including a limited liability partnership (LLP) and a limited liability company (LLC) treated as a partnership, that is doing business within the Metropolitan Commuter Transportation District may be granted approval to make group estimated MCTMT payments and file a group MCTMT return on behalf of its qualified New York resident and nonresident partners or members. A partnership, LLP, or LLC may file on a group basis only if it has two or more qualified partners or members who elect to file on a group basis for each year. In addition, all qualified partners who elect to participate in the group filing must have the same accounting period. Group estimated MCTMT payments are considered to be a group of individual estimated tax payments that meet each partner's estimated MCTMT payment requirement. Also, a group return is considered to be a group of individual MCTMT returns that meet each partner's MCTMT return filing requirement. Therefore, if a qualified partner elects to participate in the group, the partner is not required to make individual estimated MCTMT payments or file an individual MCTMT return.

Taxpayer Maintained Permanent Place of Abode

In the case of Gaied, A Notice of Deficiency for New York State and City personal income taxes was upheld because the taxpayer was found to be a statutory resident for the years at issue. The taxpayer stated that although he spent more than 183 days in New York State and City, he did not maintain a permanent place of abode. The taxpayer held property in New York City, but asserted that the property was held solely as investment property. However, the taxpayer was unable to substantiate this claim, as he failed to produce any rental income and expense accounting ledgers, bank statements, or cancelled rent checks for each of the property units during the years at issue.

New Requirement in NY for the Filing of Information Returns by Franchisors

Information returns are now being required by franchisors that have at least one franchisee that is required to be registered as a sales tax vendor. The first return was due on or before September 20, 2009 covering the period March 1, 2009 through August 31, 2009. The next returns will be due on March 20, 2010 and will cover the period September 1, 2009 through February 28, 2009. Subsequently, annual information returns will be due on March 20 and will cover the period of March 1st of the prior year through February 28th of the current year.

The information returns will require franchisee information including, name of franchisee, address, name of owner, and Federal and state ID numbers. Additional information will also be required regarding the franchise including beginning date of business, location, sales at each location, sales tax collected at each location, royalties paid to the franchisor and sales made to each location by the franchisor’s designated suppliers. This information is also required to be provided to the franchisees on or before the filing date of the returns.

Penalties of $500 per failure to file an information return will be charged up to 10 failures, and $50 per each additional failure up to a maximum of $10,000 per filing period.

No Relief for Addback of Federal Bonus Depreciation Related to Disallowed Loss From S Corporation

The New York Department of Taxation and Finance has issued a personal income tax advisory opinion concerning whether an S corporation shareholder (taxpayer) who is unable to currently deduct the flow-through loss from her S corporation on her federal income tax return, has any relief from New York Tax Law, which requires her to add back to her federal adjusted gross income the bonus depreciation allowed under Internal Revenue Code §168(k). The department advises that there is no relief under the Tax Law and the taxpayer must add back the full amount of the bonus depreciation that was passed through to her from her S corporation.

Foreign Corporation Found Exempt From Use Tax on Purchase of Aircraft

Rochester Amphibian Airways, Inc, foreign corporation, was entitled to the New York use tax exemption on its purchase and use of an aircraft. The aircraft was purchased by the corporation from Illinois residents and transfer of the plane occurred in Wisconsin. The airplane was stored in New York at various periods. However, the corporation was not a New York resident and it did not carry on any business in New York. The corporation’s mere ownership and maintenance of the plane, purchased in another state, did not constitute doing or carrying on business in New York. Thus, the corporation was entitled to the exemption.

The Division of Taxation’s contention that the corporate form should have been disregarded and the corporation’s sole shareholder be held liable for the use tax due was rejected. The Division failed to show any evidence of fraud or wrongdoing with respect to the corporation’s formation or its conduct. Also, since piercing the corporate veil presumes that the corporation was liable, and it was held that the corporation here owed no tax, there was no obligation on which the sole shareholder could have been held liable.

Transfer of Assets to Dormant Corporation Not Exempt From Sales & Use Tax

A corporation’s transfer of assets to a dormant corporation (Mohonk Oil and Propane, Inc.) in exchange for stock failed to qualify for the exemption from New York sales and use tax. The fact that upon its organization 100% of the stock of Mohonk Oil and Propane, Inc., vested in the sole shareholder and remained in his name for almost four years before being transferred to others was a significant factor against a finding that the transfer of assets in exchange for the issuance of stock occurred upon the organization of the company. The taxpayer knew or should have known when it chose to create another company that, if it remained an inactive, dormant corporation for an extended period of time, the transfer of assets to it would not qualify for the exclusion.

Taxability of Software Licenses and Services

In an Advisory Opinion letter, New York determined that a software company’s sale of the license to use its basic software package constitutes the sale of prewritten software subject to New York sales tax, regardless of where the software is stored. Additionally, other issues related to the taxability of software and service were addressed.

Taxability of Internet Advertising, Set-Up, and Support Services

The New York Department of Taxation and Finance has issued a memorandum discussing the sales and use tax treatment of various Internet advertising, set-up, support, and service fees relating to real estate listings. Charges to advertisers, agents, owners or individuals for advertising services are not subject to sales tax

Amnesty Announced

The New York Department of Taxation and Finance has issued a memorandum that discusses the Penalty and Interest Discount (PAID) Program, which encourages eligible taxpayers to pay off their eligible tax liabilities that are at least three years old. A taxpayer who participates in the program will receive a reduction in the accrued interest and penalty currently owed on eligible tax liabilities. The program period will begin on January 15, 2010, and end on March 15, 2010. However, if the taxpayer does not make full payment of an eligible liability by March 15, 2010, the taxpayer will not receive any savings on that liability.

New York City: Credit Enacted for Biotechnology Businesses,

Under recently enacted local legislation, a refundable credit against the New York City general corporation tax and unincorporated business tax has been created for biotechnology businesses. This credit is effectively identical to New York State’s qualified emerging technologies facilities, operations and training credit.

CONNECTICUT

Significant New Tax Provisions

Personal Income Taxes

Beginning with the 2009 tax year, the legislation amends the personal income tax law by:

increasing taxes for joint filers with taxable incomes over $1 million, heads of households with taxable incomes over $800,000, and single filers and married individuals filing separately with taxable incomes over $500,000;
increasing the flat income tax rate for trusts and estates from 5.0% to 6.5%;
delaying scheduled tax reductions for single filers for three years;
decoupling Connecticut law from the federal domestic production activities deduction;
establishing an "economic nexus" standard for determining whether nonresident partners or members of a partnership or S corporation are subject to the personal income tax on income from the business; and

Corporation Business Taxes

The legislation amends the corporate business tax law by:

imposing a 10% corporate tax surcharge for income years beginning in 2009, 2010, and 2011;
decoupling Connecticut law from the federal domestic production activities deduction (for income years beginning on or after January 1, 2009);
increasing the maximum preference tax for groups of companies filing combined corporation business tax returns from $250,000 to $500,000;
extending the period for which a company can carry forward unused credits for the donation of open space land from 15 to 25 years (for income years beginning on or after January 1, 2009); and

Sales and Use Taxes

The legislation lowers the sales and use tax rate from 6% to 5.5% effective January 1, 2010. However, this rate decrease is contingent on meeting certain revenue projections. In addition, the fee for a seller's permit will be increased from $50 to $100 per permit effective October 1, 2009.

Amnesty Program

The Department of Revenue Services (DRS) is required by the legislation to establish a "tax settlement initiative program" from October 1, 2009, to December 31, 2009. This amnesty program will be available to anyone who owes state taxes (other than motor carrier road taxes), interest, or penalties for any taxable period for which (1) the DRS imposed interest or penalties for late payment or underreporting of taxes, or (2) the DRS imposed interest or additional tax because the taxpayer failed to file a return and DRS filed one for the taxpayer

Estate and Gift Taxes

Under the new law, the transfer tax threshold is raised from $2 million to $3.5 million on:

the estates of decedents dying on or after January 1, 2010; and
taxable gifts made by a donor during a calendar year commencing on or after January 1, 2010, including the aggregate amount of all taxable gifts made by the donor during all calendar years commencing on or after January 1, 2010.

In addition, the time an executor has to file an estate tax return is reduced from nine months to six months after the date of death, starting with deaths occurring on or after July 1, 2009.

Real Estate Conveyance Taxes

Beginning in 2010, the real estate conveyance tax will apply to property that is foreclosed by sale through a court-order. Current law exempts such properties from the tax.

District of Columbia

Combined Reporting

Beginning after December 31, 2010, all corporations taxable in the District must determine their income apportionable and allocable to the District by reference to the income and apportionment factors of all commonly controlled corporations organized within the U.S. with which they are engaged in a unitary business.

Disallowance of Certain Expenses Paid to Related Parties

Effective for tax years beginning after December 31, 2008, any otherwise deductible interest or intangible expense, if directly or indirectly paid to, accrued or incurred by, or in connection directly or indirectly with, one or more direct or indirect transactions with one or more related members is disallowed. However, the disallowance of any portion of the interest or intangible expense will not apply to the extent the corporation is able to establish the following:

the transaction giving rise to the payment of the expense between the corporation and the related member did not have as a principal purpose the avoidance of tax;
the expenses was paid pursuant to an arm's length contract at an arm's length rate of interest or price; and
during the same taxable year, the related member directly or indirectly paid the expense, or the expense was accrued or incurred by a person who is not a related member; or
the related member was subject to tax measured by its net income or receipts in the District, a state or possession of the U.S., or a foreign nation that has entered into a tax treaty with the U.S; and
the aggregate effective tax rate imposed on the amounts received by the related member is equal to or greater than 4.5%.

Temporary Increase in Sales Tax Rate

The District of Columbia's Fiscal Year 2010 Budget Support Emergency Act of 2009 temporarily increases the general sales and use tax rate to 6% (currently 5.75%), for the period beginning October 1, 2009, and ending September 30, 2012.

NORTH CAROLINA

Budget Signed Enacting Tax Changes

Tax Surcharges

A corporate income tax surcharge equal to 3% of the corporate income tax due for the taxable year. Similarly, a personal income tax surcharge of 2% or 3% would also be imposed. The surcharges would only be in effect during the 2009 and 2010 tax years.

IRC Conformity

The legislation provides an update to North Carolina’s personal income and corporate income tax Internal Revenue Code (IRC) conformity date from May 1, 2008, to May 1, 2009, with specified exceptions, effective beginning with the 2008 taxable year. However, any amendments to the IRC enacted after May 1, 2008, that increase North Carolina taxable income for the 2008 taxable year would become effective for taxable years beginning after 2008.

Sales and Use Tax Changes

The legislation also includes a provision that would: (1) increase the state sales and use tax rate from the current rate of 4.5% to 5.5% applicable to sales made on or after September 1, 2009, and before October 1, 2009; and (2) increase the state sales and use tax rate to 5.75% effective October 1, 2009. The 5.75% rate would expire July 1, 2011. Currently, the rate is scheduled to increase to 4.75% effective October 1, 2009.

The legislation also includes a presumption of nexus for certain online retailers and would extend the sales and use tax to digital property

The legislation also extends the sales and use tax to the following digital property delivered or accessed electronically: audio and audiovisual works, books, magazines, newspapers, newsletters, reports or other publications, and photographs or greeting cards. The tax would be applicable regardless of whether the purchaser has a right to use the digital property permanently or to use it without making continued payments. The tax would not apply to a service that is taxed under another subdivision or to an information service

OHIO

Corporate Income Tax: Phase-Out Reminder

The Ohio Department of Taxation has issued an information release reminding taxpayers that the corporate franchise tax phase-out was complete with the filing of the 2009 franchise tax report (based on the taxable year ending in 2008). Most corporations are not subject to the franchise tax for tax years (report years) 2010 and thereafter. Corporations that are not subject to the 2010 franchise tax (based on the taxable year ending in 2009) are not subject to the minimum fee and have no report year 2010 franchise tax payment or filing obligation. Prior filing and payment requirements still apply for those corporations that are still subject to the franchise tax. Financial institutions must file form FT 1120FI and all other corporations still subject to the franchise tax must file form FT 1120.

PENNSYLVANIA

Tax Amnesty

The State of Pennsylvania has announced an amnesty program which will run from April 26, 2010 through June 18, 2010. Under the amnesty period the State will waive all penalties and one half of the interest otherwise due on unpaid taxes that are delinquesnt as of June 30, 2009.