Administrative Developments

1. Commissioner Ruling No. 23824 (Dec. 9, 2013). Gain and loss from sale of functionally integrated subsidiaries classified as business income.

The Commissioner upheld the Tax Division’s reclassification of gain and loss from the sale of

Taxpayer’s subsidiaries as business income. The Commissioner relied on the Idaho Supreme Court’s decision in Union Pacific v. Idaho State Tax Commission, 28 P.2d 375 (2001), holding that an item of income is business income if it satisfies either the “transactional test” or “functional test.”

Prior to 2001, the Taxpayer had filed two separate unitary group returns. Beginning with taxable year 2001, the Taxpayer had informed the Commission that it would begin filing as a single unitary group.

Based on the Taxpayer’s determination that the two groups were part of a single unitary business from 2001 forward, the Commissioner held that the gain and loss from the sale of one business satisfied the functional test and constituted business income subject to apportionment.

2. Commissioner Ruling No. 25749 (Apr. 17, 2014). Taxpayer may not carry over another entity’s net operating loss following a merger where the company did not correctly file returns in prior years and the taxpayer did not continuously operate the business of the old loss corporation.

Taxpayer was denied a net operating loss (“NOL”) carryover created by a wholly owned subsidiary that was merged into the parent corporation after the loss was created. The subsidiary was acquired by the Taxpayer in 2000, and merged into the parent in 2005. Prior to the merger, the subsidiary filed Idaho corporate income tax returns on a separate entity basis, reporting large Idaho NOLs.

During a telephonic hearing, the Taxpayer was unable to explain why the subsidiary had been filing on a separate entity basis. Because the Commissioner was unable to determine whether the subsidiary should have been included in a combined return and, if so, what the combined group’s NOL would have been for such tax years, the Taxpayer was not entitled to carry over the loss after the merger. The

Commissioner also found, based on the returns filed, that the Taxpayer did not continuously operate the business enterprise of the old loss corporation.

3. Commissioner Ruling No. 25612 (Mar. 28, 2014). S Corporation may subtract research expenses when calculating nonresident owners’ income tax liability.

The Commission ruled that an S Corporation was entitled to subtract research expenses when calculating its nonresident owners’ income tax liability in 2009 and 2010, relying on amendments to Idaho Admin.

r. 291.03 which no longer disallowed the use of separately stated pass-through deductions. Because the S Corporation took a reduced credit under I.R.C. § 280C(3), the full amount of the entity’s research expenses were available as an expense, and the nonresident owners were entitled to their distributive

share of the federal credit for increasing research activities and the full deduction of the related expenses.

4. Commissioner Ruling No. 24989 (Mar. 4, 2013). Income from investment in related business was nonbusiness income allocable to taxpayer’s state of domicile.

Taxpayer, a provider of professional services and business information to legal, financial, real estate, and governmental affairs sectors across the United States, filed an Idaho combined income tax return, including its 35 percent investment in a related entity (“Subsidiary”). Some elements of unity between Taxpayer and Subsidiary were present, including the entities being in the same line of business and the acquisition of Subsidiary fitting Taxpayer’s business strategy. However, the Commission ruled that Taxpayer’s ownership percentage indicated a lack of control, and thus the businesses were not unitary and Taxpayer’s income from the investment was nonbusiness income.

5. Commissioner Ruling No. 21626 (Dec. 20, 2012). Net cost of inventory exchanged in buy/sell agreement includable in sales factor.

Taxpayer filed returns including the net cost of inventory traded under buy/sell agreements (the

“Agreements”), in its sales factor, and later filed amended returns including the gross amounts of the transactions. Under the Agreements, Taxpayer agreed to deliver a certain grade, quality, and quantity of oil at a future date to a party and, in exchange, receive an equivalent grade, quality, and quantity of oil at that time or some other specified date. Taxpayer argued that the exchanges constituted sales and that the full value received constituted gross receipts appropriately included in the denominator of its sales factor. The Tax Division argued that the continuous buy/sell exchanges do not complete the earnings process, and Taxpayer’s proposed treatment in effect doubles the amount of gross receipts for the transactions.

Under the Agreements, there was no recognition of gain or loss when product was exchanged. Any value or cost differential resulting from the exchange was treated as inventory and cost of goods sold adjustments. Any gain from the exchange was not recorded until the product was sold to a third party.

Accordingly, the Commission ruled that the Agreements be included in the net cost of the inventory exchanged in calculating Taxpayer’s sales factor.

6. 2014 Legislative Approval of Administrative Rule Changes (eff. 3/20/14) The Legislature approved the following franchise tax administrative rule changes:

 Amended Idaho Admin. Code r. 35.01.01.105 incorporates prior legislation regarding addbacks for state and local taxes deduction for federal income purposes and passive losses deducted during a tax year in which the taxpayer did not transact business in Idaho.

 Amended Idaho Admin. Code r. 35.01.01.105, .180, and .254 incorporate prior legislation regarding loss recovery deductions and donations of technological equipment.

 Amended Idaho Admin. Code r. 35.01.01.263, .270, .280, and .291 contain partnership income sourcing provisions.

 Amended Idaho Admin. Code r. 35.01.01.714 clarifies that for purposes of the capital investment credit, qualifying property must remain in Idaho during the recapture period, not the entire credit carryover period.

 Amended Idaho Admin. Code r. 35.01.01.880 provides that claims for refund or credit of

amounts paid as backup withholding by pass-through entities generally must be filed within three years of the due date of the return for the year for which the tax was withheld or paid. If the refund or credit claim relates to an overpayment attributable to an Idaho net operating loss carryback incurred on or after January 1, 2013, an amended return carrying the loss back must be filed within one year of the end of the tax year of the loss the results in the carryback.

7. 2013 Legislative Approval of Administrative Rule Changes (eff. 4/4/13) The Legislature approved the following franchise tax administrative rule changes:

 Amended Idaho Admin. Code r. 35.01.01.105, reflecting 2012 legislation providing that passive losses incurred during years in which a taxpayer had no activity in Idaho are not deductible.

 Amended Idaho Admin. Code r. 35.01.01.171, clarifying what constitutes non-qualifying property for purposes of the capital gain deduction.

 Amended Idaho Admin. Code r. 35.01.01.286, clarifying allocation and apportionment

procedures used by an S corporation and its qualified subchapter S subsidiaries carrying on more than one unitary business.

8. 2012 Legislative Approval of Administrative Rule Changes (eff. at conclusion of 2012 Legislative session – 3/29/2012)

The Legislature approved the following franchise tax administrative rule changes:

 Amended Idaho Admin. Code r. 35.01.01.756, informing employers of the requirements to qualify for the credit created by H.B. 297, 2011 1^st Leg. Session. The Rule defines employer-provided health-care benefits found in IDAPA 18.01.30, basing the definition of “employer-provided” on the national averages of the employer share of premium costs. The Rule had previously been adopted on an emergency basis.

 Amended Idaho Admin. Code r. 35.01.01.105, .120, .125, .253, and .245, reflecting 2011 legislation that decoupled Idaho from federal provisions extending and increasing amounts allowed for bonus depreciation for property placed in service after 2009.

 Amended Idaho Admin. Code r. 35.01.01.171, specify that gains treated as ordinary income in accordance with examples under I.R.C. § 1231 do not qualify for Idaho capital gains deductions.

 Amended Idaho Admin. Code r. 35.01.290, reflecting 2011 legislation that modified provisions regarding elections to have pass-through entities pay tax on owners’ or beneficiaries’ income.

 Amended Idaho Admin. Code r. 35.01.01.887, reflecting 2011 legislation that modified provisions governing back-up withholding by pass-through entities.

III. SALES AND USE TAX A. Overview

Idaho imposes a 6% sales tax on all sales at retail and certain services. Taxable services include

producing, fabricating, processing, printing, or imprinting tangible personal property furnished directly

nondepreciable goods and services directly consumed by customers and included in the charge for such items; and intrastate transportation for hire on nonregularly scheduled flights. Idaho uses an essence of the transaction test for mixed sales. Certain resort cities, counties, and auditorium districts have a local sales tax option. The tax is imposed on the consumer, but the retailer is responsible for collection. Idaho follows destination-based sourcing for general retail sales.

B. Legislative Developments 2014 Second Regular Session

1. Enactment of Idaho Reimbursement Incentive Act (eff. 7/1/14)

H.B. 546 enacted the Idaho Reimbursement Incentive Act, creating a refundable tax credit for qualified business entity applicants that meet certain job and revenue creation requirements. To qualify, the business entity must create at least 50 new jobs (20 in a rural community) over the term of the project, not to exceed 15 years. The entity must also generate an approved percentage (up to 30%) of “new state revenue;” defined as “the Idaho portion of state corporate income tax, personal income tax and use tax that is paid by the applicant in excess of those taxes paid at the date of the application and is attributable only to the new growth upon which the project is based.”

2. Creation of Tax Relief Fund (eff. 7/1/14)

H.B. 593 creates a Tax Relief Fund for sales tax collected and remitted from retailers who are not engaged in business in Idaho and would not have been required to collect Idaho sales tax. Monies in the account are directed to be used for tax relief.

3. Remotely Accessed Cloud Software Exempt (eff. 7/1/14)

H.B. 598 clarifies that remotely accessed computer software is not considered tangible personal property, and therefore is not subject to sales tax. “Remotely accessed computer software” means computer software that a user accesses over the internet, over private or public networks, or through wireless media, where the user’s right to access the software is by means of a license, lease,

subscription, service or other agreement.

4. Use Tax Exemption for Food and Beverages Donated to Individuals and Nonprofits (eff. 3/18/14)

H.B. 530 provides a use tax exemption for food and beverages donated to individuals or nonprofit organizations registered with the secretary of state.

2013 First Regular Session

1. Cloud Computing Application Software not Taxable (eff. 4/3/13)

H.B. 243 excludes application software accessed over the internet or through wireless media from the definition of tangible personal property. The exclusion applies to the right to use computer software accessed from a location owned or maintained by the seller or the seller’s agent and not loaded and left at the user’s location. The exclusion does not apply to software whose primary purpose is for

entertainment use, nor does it apply if the vendor offers the same or comparable software through wholesale or retail channels in a storage media or by electronic download.

2. Definitions of “Primary” and “Primarily” Added (eff. 7/1/13)

H.B. 15 defines the terms “primary” and “primarily” (both previously undefined) as the predominant or greatest use of property, for purposes of determining taxable and nontaxable use.

3. Exemption for Food and Beverage Tastings (eff. 3/21/13)

H.B. 187 provides a use tax exemption for food and beverage tastings, including beer and wine.

2012 First Regular Session

1. Exemption for Parts Installed on Privately Owned Aircraft (eff. 3/9/12)

H.B. 417 exempts parts installed on private aircraft owned by non-residents, consistent with the taxation of parts installed as components of aircraft manufactured in Idaho and sold to non-residents and parts installed on aircraft in commercial use. The exemption sunsets on June 30, 2016.

2. Interstate Trucks Registered Under the International Registration Plan (eff. 7/1/12) H.B. 361 modifies the claw-back period in which vehicles with a maximum gross registered weight over 26,000 pounds will be deemed to have been sold for use in Idaho if not substantially used in interstate commerce. The relevant period under the International Registration Plan is now any four fiscal year quarters beginning July 1, and ending June 30 of each year, consistent with the time period for filing International Fuel Tax Agreement returns and applications.

3. Free Beverage Samples Exempt From Use Tax (eff. 3/13/2012)

H.B. 489 exempts beverages, including but not limited to wine and beer, from use tax if given as a free tasting to a potential customer.