Nebraska State Tax Traps for the Unwary
Based on recent developments, I’ve updated the list of tax traps in Nebraska for companies and their advisors to be aware of:
Income and Sales/Use Tax Audit Appeals
- The protest to an audit appeal must be filed within 60 days and must request a hearing. Failure to do so will result in loss of ability to make the necessary record and loss of the option to appear before a Hearing Officer.
- Nebraska does not provide the option to appeal an income tax audit by paying the income tax and filing a refund claim. If the audit is not appealed, it becomes final.
- The audit appeal needs to detail certain required statements addressing the nature and legal specifics of the defense.
Sales and Use Tax Refund Claims
- Sales and use tax refund claims must request a hearing and must detail the nature and legal specifics of the claim. Failure to do so results in the loss of the ability to preserve the legal grounds and to make the necessary record and the loss of the option to appear before a Hearing Officer.
Statute of Limitation Extensions
- The Department of Revenue does not have the authority to resurrect an expired statute of limitations. An extension (for each tax category) needs to be signed by both the taxpayer and the Department before the expiration of the normal or extended period.
- Ongoing renewal of extensions needs to be considered even during pendency of the tax appeal or refund claim.
Property Tax Appeals
- Depending on the nature of the property tax appeal (e.g., challenging valuation, uniformity or coverage within a tax incentive or other exemption), the appeal may be proper to (or limited to only) the County District Court, the County Board of Equalization or the Tax Equalization and Review Commission.
Tax Appeals to District Court
- Generally, most tax appeals to County District Court are heard on the basis of the record made at the administrative hearing. Therefore, the administrative hearing in front of the Nebraska Department of Revenue’s Hearing Officer essentially functions as a trial court (so the preparation of the protest needs to take this into account). Different elections also apply for the use or nonuse of normal rules of evidence.
Nebraska Tax Incentive Programs
- The main program is the Nebraska Advantage Act. This provides a variety of state and local tax incentives where a company meets and maintains certain new job and/or investment thresholds.
- The application needs to be filed before the project begins. Don’t be misled by the pre-printed application form. Multiple planning aspects apply for determining the scope and content of the application. Once filed and approved, an agreement for the project is entered into with the State of Nebraska through the Department of Revenue. Ongoing business, tax and project contract requirements need to be met to optimize the available incentives.
- Generally, affirmative action is required by the company to file and claim the various income, sales/use, property and withholding tax benefits.
- Specified tax recapture applies if the applicable new job/investment threshold is not maintained for a designated entitlement period.
Nebraska Sales/Use Tax Manufacturing Exemption
- Certain designated equipment and related purchases by manufacturers are exempt from sales/use tax. Certain areas are subject to narrow (and often challengeable) Department of Revenue contentions on coverage, depending on the nature and integration of the equipment with the facility.
- Care needs to be taken that if the project is built through a contractor, the contractor needs to be an Option 1 contractor (rather than an Option 2 or 3 contractor).
Tax Increment Financing
- Nebraska’s Tax increment Financing Program, available for real estate improvements in blighted and substandard areas, requires certain advance approvals, along with determinations as to the allowable usage of the TIF funds.
Nebraska Taxable Income Apportionment
- Approval for departures from the statutory method should be sought by demonstrating the necessary conditions to the Tax Commissioner before filing your income tax return.
Nebraska Capital Gain Exclusion
- Shareholders may exclude the capital gain on the sale of stock in their employer, provided the corporation is owned by at least 5 persons, with at least 10% of the stock owned by one or more persons not related to the other 90%. The Department of Revenue contends their version of an “economic substance” test applies for stock acquired within one year before the sale. The Department also contends the deemed asset portion of an “S” corporation gain in an IRC § 338(h)(10) election does not qualify. These positions are challengeable.
- Software development contracts are subject to sales/use tax unless they contain 3 specified provisions relating to control, liability and ownership. These are often just written up on audit and should be addressed on appeal.
- Software licenses may be eligible for the state tax investment credit incentive, provided they meet certain nonexclusivity and related tests.
Purchase/Sale of Property or Services
- In a transaction where both property and service are provided, the Department will look to 6 key factors in applying an “incidental-to-service” test. The Department tends to view the factors in favor of taxable sales of property. The terms and protections drafted into the contract become key to this.
The above is not intended to be an exhaustive list, but instead is simply a selection of key state and local tax issues and potential tax traps.