TWIST - This Week in State Tax

New Jersey: Guidance Released on Inclusion of Captive Entities in the Combined Group and Small Bank Exception

The New Jersey Division of Taxation has recently issued a number of Technical Bulletins and revised Technical Bulletins addressing various aspects of the legislation enacted in July that made substantial changes to the Corporation Business Tax (CBT). The latest new bulletin is TB-113, which addresses the inclusion of certain captive entities in the New Jersey combined group and the exception for captives owned by small banks and savings & loans. Effective for privilege periods ending on and after July 31, 2023, “captive” investment companies, regulated investment companies, and real estate investment trusts are taxed as C corporations and included in the combined group. Prior to this period, such entities filed a separate return. An exception from inclusion applies to real estate investment trusts, investment companies, and regulated investment companies of which at least 50 percent of the shares, by vote or value, are owned or controlled, directly or indirectly, by a state or federally chartered bank, savings bank, or savings & loan association with assets of $15 billion or less. The Bulletin reminds taxpayers that the exception for a bank (or savings & loan association) does not apply to the banks or the savings & loan associations themselves.

Importantly, TB-113 sets forth rules for determining the value of assets for purposes of the exception; in most instances, this will be measured by the annual average value of the bank’s assets based on the bank’s quarterly reports filed with the regulatory authorities reported in accordance with U.S. G.A.A.P. or I.F.R.S. However, the Bulletin notes that there are some instances in which an annual average of the assets may not be the best measure for determining whether the investment companies, regulated investment companies, and real estate investment trusts must be included as “captives.” These include when certain types of mergers and acquisitions occur, or there are unforeseeable events that affect the value of a bank’s assets. The Bulletin also provides guidance on aligning the captive’s income reporting period with the combined group privilege period. If the “captives” have a different privilege period than the group privilege period, they must file short period returns for the months preceding the start of the group privilege period. If they have a different federal tax year than the group privilege period, the income of the investment companies, regulated investment companies, and real estate investment trusts occurring during the months of the group privilege period must be reported on the combined return, and a short period return must be filed for months preceding the investment companies, regulated investment companies, and real estate investment trusts being included as members of the combined group. If in a subsequent group privilege period the investment companies, regulated investment companies and real estate investment trusts were excluded from the combined group because their parent had assets valued at $15 billion or less, then such entities would file separate returns. Finally, the Bulletin provides examples of when filings are required in the case of mergers or acquisitions. Please contact Jim Venere with questions on TB-113 (N.J. Division of Taxation, Nov. 1, 2023).

New York: Proposed Bill Would Tax Companies When the Use of Technology Displaces Workers

Recently-introduced New York Assembly Bill 8179 would, if enacted, impose a tax on certain businesses when employees of the company are displaced from their employment due to the deployment of certain technologies. The memo for A. 8179 notes that a 2018 study predicted that 12 percent of all jobs in New York State were at risk of being replaced by automation for that year and that this amount was expected to increase. Effective for tax years starting January 1, 2024, the new “additional tax on using technology to displace workers” would be imposed in addition to the normal corporate franchise tax under N.Y. Tax Law § 209 in amount equal to the sum of any taxes or fees imposed by the state or political subdivision based on an employee’s wages that are paid by a corporation or the employees. These taxes and fees include, but are not limited to, the state income tax, state unemployment insurance, and local occupational taxes. The tax would be based on such fees and taxes paid during an employee’s final year of employment with the company if the employee’s position was replaced by technology. Technology would include machinery, artificial intelligence algorithms, or computer applications. The bill does not include specific guidance for determining when a worker is displaced with technology. However, the bill authorizes regulations to be added, amended or repealed to implement the bill’s provisions on its effective date. Please stay tuned to TWIST for legislative updates.

Texas: Services Containing Data Processing Elements Not Necessarily Taxable

The Texas Comptroller of Public Accounts has clarified that certain employee health benefits and retirement administration services containing data processing components are not necessarily a taxable data processing service. In a private letter ruling, the Comptroller clarified, among other issues, that the use of data processing services to facilitate the provision of certain employee health benefits and retirement administration services does not cause said services to become taxable data processing services. The requesting taxpayer provided several services to streamline employee health benefits administration and to develop and administer retirement plans for employees. Specifically, the taxpayer provided the following services: (1) Flex Spending Account; (2) COBRA Administration; (3) Retirement Plan Administration & 401(k) Reporting; and (4) ACA Reporting Only.

For the first three services listed, the Comptroller noted there were components of data processing services being provided, such as compiling and storing account information, notices, and statements, as well as the manipulation of data. However, these services also required professional knowledge and skills in physical sciences, accounting principles, and tax law, which goes beyond the mere processing of data. Accordingly, the Comptroller reasoned that the data processing component of these services merely facilitated the provision of an overall service that required the application of professional knowledge and skills. Because such services were not expressly enumerated as taxable services, such as insurance services, the taxpayer had no Texas sales and use tax obligation despite the presence of a data processing component to the overall services. The Comptroller contrasted this with the ACA Reporting Only services, which the Comptroller found to be a taxable data processing service (akin to payroll processing services) because it consisted merely of automated generation, printing, distribution, and filing of IRS forms involving the compilation and manipulation of customer data and did not require the application of professional knowledge and skills.

Of note, the Comptroller found the taxpayer’s ACA Comprehensive and Eligibility Verification service lines to be taxable insurance services. They included evaluating the eligibility or qualification of employees and their dependents for insurance coverage under the ACA, thus meeting the definition of insurance investigation which is a taxable insurance service. Please contact Karey Barton with questions on Private Letter Ruling No. 20220222104614.