2015 state tax developments - windham brannon wb state develo… · 2015 state tax developments ......

2015 STATE TAX DEVELOPMENTS What You Need to Know for the Upcoming Year

Presented by

Tim Clancy and Mark Coles

Windham Brannon P.C.

January 19, 2015

Agenda

• United States Supreme Court Decisions • Apportionment of Income • Combined/Unitary Reporting • Business Income • Modifications • Nexus • Tax Rate Changes • Tax Credits • Net Operating Losses • Other Taxes

United States Supreme Court

Comptroller of the Treasury v. Wynne • Maryland failed to allow a credit against county personal

income tax for Maryland residents for their pass through income taxed by other states

• Violated internal consistency test and fair apportionment requirement of Commerce Clause as double taxation could exist

• Consider amended return • Class action complaint pending on interest rate to be

paid • Kansas and Iowa have agreed to acquiesce Comptroller of the Treasury v. Wynne 135 S. Ct 1787 (2015)


First Marblehead Corp v. Commissioner or Revenue –

• Financial institution excise tax and apportionment of taxpayer facilitating student loans

• Summary disposition issued and remanded to Massachusetts Judicial Court as a result of Wynne

• Courts need to consider internal consistency test (hypothetical adoption of same law by all states)

23 N.E.3rd 892(Mass. 2015)


Direct Marketing Association –

– Tax Injunction Act did not bar a challenge in federal court of Colorado’s sales and use tax notice and reporting requirements for out of state retailers.

Obergefell v. Hodges –

– Same-sex right to marry forcing states to allow marriages and accept marriages from other states including for filing joint tax returns

Obergefell v. Hodges, 135 S. Ct. 2548 (2015)

Agenda


Apportionment

Multistate Tax Compact

– States continue to affirm a taxpayer cannot elect to use the equally weighted three-factor apportionment formula provided by the Compact • California • Minnesota • Texas • Oregon • Michigan (2014)

– Continued repeal of Compact in entirety or in part by states

o Kimberly-Clark Corp v. Comm’r of Revenue, Minnesota Tax Court File No. 8670-R June 19, 2015 o Graphic Packaging Corp v. Hegar, 471 S.W. 3d 138 (Tex. Ct. app. 2015 o Health Net, Inc. v Department of Revenue, Oregon Tax Court, No. TC 5127, Sept 9,2015 o International Business Machines Corp. v Dept. of Treasury, 852 N.W. 2d 865 (Mich. 2014)

Apportionment

California – Multistate Tax Compact

– California Supreme Court ruled the state may preclude corporations from the use of the Multistate Tax Compact

– Single sales factor apportionment required

– Appeal to U.S. Supreme Court is anticipated

The Gillette Co. v Franchise Tax Bd., Cal S2006587, opinion , 12/31/2015

Apportionment

Massachusetts – Market Sourcing

– Issued final regulations for market based sourcing

– Voluminous and complex

– Establishes uniform rules

• Whether and to what extent a market for a sale is in the state

• Reasonable approximation if market can not be determined

• Throw-out sales

– Covers various types of services

• In-person

• Services delivered to or on behalf of customer

• Professional services

Apportionment

Multistate Tax Compact -Sales of Services

– Market based sourcing regulations were approved by Commission's Uniformity Committee

– Similar to Massachusetts rules using hierarchy

– Full adoption may occur in 2016

– Regulation concerns

• Throw-out

• Reasonable approximation

WILL STATES ADOPT OR REPEAL THESE PROVISIONS???

Apportionment

New York City – Market Sourcing

– Adoption of market based sourcing of receipts other than tangible personal property

– Rules similar to state of New York

– Provides special rules for

• Digital productions

• Financial transactions

• Advertising

• Other industry specific receipts

Apportionment

Indiana – Sourcing of Sales of Services – Indiana is a “cost of performance” state

• Use “transactional approach” • Typically never reaches to Cost of Performance issue • Narrowly defines “income producing activity”

– Taxpayer providing online educational services to students could not use cost of performance method.

Letter of Findings 02-20140455 Indiana Dept. of Revenue Jan 28, 2015

– Out of state franchisor was not permitted to use cost of performance

method to source revenue. Dept. determined services were “rendered” in Indiana since that was the location of the where purchased.

Letter of Findings No. 02-20130402, Indiana Dept. of Revenue, Feb 25, 2015

Apportionment

Oregon – Sourcing of Sales of Services

– “Cost of performance” for sales of other than tangible personal property

– Oregon Supreme Court decision

• Use transactional approach instead of operational approach

• “Income producing activity” applied to individual sales to customers.

• Limits cost included in analysis

AT&T Corp. v. Dept. of Revenue, Oregon Supreme Court No. SC C060150 Sept. 11, 2015

Apportionment

Indiana – Throwback sales

– Sales of products shipped to states where the taxpayer is not subject to tax are no longer included in the sales factor numerator.

– Effective January 1, 2016

S.B. 441 amending Ind Code §6-3-2-2(e)

Apportionment

California – Occasional/Substantial Transactions

– Gross receipts from the taxpayer’s line of business was determined to be substantial and excluded from sales factor for apportionment.

– Substantial – if excluding receipts results in 5% or greater decrease in sales factor denominator

– Occasional - if the transaction is outside the normal course of business

Chief Counsel Ruling 2015—01, California Franchise Tax Board Sept. 11, 2015

Apportionment

Connecticut – Single Sales Apportionment

– Repeals the three-factor apportionment for corporations deriving income for sale or use of tangible personal property.

– Single sales factor will be used for years on or after January 1, 2016.

Apportionment

North Carolina – Factor weight

– Phasing from double weighted sales to single sales apportionment • 2016 - Triple weighted sales

• 2017 - Quadruple weighted sales

• 2018 - 100% sales

Apportionment

Tennessee

– Apportionment will change from double weighted sales to triple weighted sales.

– Market based sourcing is adopted.

– Effective July 1, 2016

North Dakota

– Election may be made by corporations to phase to singles sales factor over next four years.

Apportionment

Missouri

– Expands the optional single sales factor apportionment election to sales of services and intangibles

– Market based sourcing used

– Effective date may be questionable

• August 28, 2015?

• All of 2015?

• 2013 (original optional election legislation enactment)?

• Returns filed after August 28, 2015

Apportionment

Rhode Island

– Apportionment regulations amended for

• Single sales factor

• Market based sourcing

– Use of hierarchical order

– Throw-out of sales

– Special Industry rules

– Mandatory combined reporting - Finnigan

– Effective for years on or after January 1, 2015

Agenda


Combined Reporting

Connecticut

– Connecticut H.B. 7051 enacted mandatory combined reporting

– Significant backlash

– Connecticut H.B. 1502 delays implementation of combined reported until years starting on or after January 1, 2016

– Special legislative session S.B 1601 - “significant amendments”

Combined Reporting

New York City

– Adopted the state of New York combined reporting requirements adopted in 2014

– Required if there is unitary business and more than 50% ownership or control


Combined/Unitary

New York

– New York tax reform did not provide statutory definition for the term “unitary”

– Tax Tribunal determined a taxpayer could file combined report since they were “unitary” based on facts

– “Instant unity” may occur

Consider all aspects to whether companies are unitary!!

Matter of SunGuard Capital Corp. DTA Nos. 823632, 823632, 823680, 824167, 824256, N.Y.S. Tax App. Trib. May 19, 2015

Combined/Unitary

Vermont

– Vermont Supreme Court determined a ski resort was not unitary with parent that primarily operated an insurance business.

AIG Insurance management Service, Inc. v Department of Taxes, Vermont Supreme Court, Docket No. 2014-312, Nov. 20, 2015

Combined Reporting

Texas

– Two companies commonly controlled by same owners were permitted to file a combined return

– State argued companies had to be part of an affiliated group.

Decision Hearing Nos 109-672, 109-673, 109-674, 109-675 Texas Comptroller of Accts June 23,2015

Combined Reporting

Indiana

– The state forced combined taxpayers who filed separate returns even though the taxpayer provided transfer pricing report

– State said the report was not controlling since

• Taxpayer’s pricing did not change over 30 years

• Report predated a merger

Letter of Findings, No 02-20130641, Indiana Dept. of Revenue, February 25, 2015

Combined/Unitary

Minnesota

– Statements made by employees during audit phase of controversy resulted in unitary determination

– Company failed to prove the employee lacked authority to make comment

SunGuard Data Systems, In. v. Commissioner of Revenue, Minnesota Tax court, Docket No. 8461-R, August 11, 2015

Agenda


Business Income

Utah -

– State applied the functional test to determine certain gains constituted business income and apportionable

– Contemplated sale of different subsidiaries

Business Income

Oregon – Tax Haven

– Current law requires add back to federal taxable income on income/loss for member of unitary group and incorporated in a “tax haven” jurisdiction.

– Also includes apportionment factors

– Legislation

• Modified list of “tax haven” jurisdictions effective January 1, 2016

• Allows for petition of alternative apportionment

Business Income

District of Columbia– Tax Haven

– City Council named 39 countries determined to be tax havens

– Income and apportionment from tax havens to be included in business income

– Temporarily repealed due to contention from business and countries

Business Income

Connecticut – Tax Haven

– Income and apportionment from tax havens to be included in business income

– 5 unclear definitions provided

– List to be published by Commissioner by June 30, 2016

– Special legislation narrowed the definition of a “tax haven”

• Excludes jurisdictions with treaty with US

Agenda


Modifications

Indiana – Intercompany Transactions

– All intercompany interest must be added back to income

– Previously only applied to interest related to intangibles

– Limited exceptions available


Modifications

Indiana – Intercompany Transactions

– Court held Department improperly adjusted taxpayer’s income under alternative apportionment provisions.

– State asserted Intercompany transactions distorted income.

Columbia Sportswear USA Corp. v. Indiana Dept. of Revenue of State Revenue, Indiana Tax Court, Cause No 49T10-1104-TA-00032 Dec. 18, 2015

– Distortion of income existed related to royalty payments paid to a subsidiary.

Letter of Findings No 02-20140358, Indiana Dept. or Revenue Jan. 28, 2015

Modifications

North Carolina

– Addition modification required for amount of net interest paid to related member • The excess of interest paid or accrued by the taxpayer to related member

during the taxable year over the amount of interest from a related member included in the gross income of a taxpayer for the taxpayer for a taxable year

– Subtraction modification for “Qualified interest” paid to a related member • Interest expense paid or accrued to a related member in the taxable year

not to exceed 30% of the taxpayer’s adjusted taxable income

• Exceptions are available to the limitation

Modifications

Tennessee

– Prior law – intangible expense permitted if disclosed and approved by commissioner

– Current law – intangible expenses permitted expense disclosed and

• Related party is registered for and paying excise tax

• Expense was paid to an affiliate in a foreign nation that is signatory to a U.S. tax treaty

• To affiliate that is not otherwise required to be registered to for excise tax

Modifications

Louisiana

– 100% dividend received deduction is now limited to 72%.

– May be taken over 3 year period (2017 – 2019).

Modifications

Mississippi

– Dividend exclusion statute violated the Commerce Clause

– Law did not allow the exclusion of dividends received from a business not doing business in Mississippi.

AT&T Corp v. Mississippi Dept. of Revenue Mississippi

Chancery Court Hinds County Cause No G-2004-1393 March 20,2015

Modifications

Wisconsin

Clarified treatment of modifications when business is sold or liquidated.

• Final returns – unused subtraction is recognized

• Entity continues (shareholder sells stock) – subtraction continues to be used over useful life

2014 Tax Practitioner Questions & Answers, Wisconsin Dept. of Revenue Jan. 13, 2015

Agenda


Nexus

Maryland

– Out of state subsidiary holding intellectual property for its parent was doing business and subject to tax

– State used a blended apportionment of parent and affiliated entities

ConAgra Brands Inc. v Comptroller Maryland Tax Court 09-IN-00-0510 Feb 24, 2015

– Multistate retailer and subsidiary engaged in substantial intercompany transactions subjected to income tax

Staples Inc. v Comptroller of the Treasury, Maryland tax Court Nos. 09-IN-OO-0148; 09-IN-00-0149, May 28, 2015

Nexus

New Jersey

– Technical Bulletin – Delivering goods sold in own vehicles is no longer considered nexus creating

– Similar provisions in other states

Nexus

Alabama and Tennessee

– Factor presence test enacted for

– Nexus established if any of the following exist • $50,000 property

• $50,000 payroll

• $500,000 sales

• 25% of total property, payroll or sales

– P.L. 86-272 still applies

– Effective dates

• Tennessee July 1, 2016

• Alabama January 1, 2015

Agenda


Tax Rate

Texas

Does the use of an unaffiliated third party manufacturer to produce products preclude use of reduce tax rate (wholesalers/retailers)?

– Definition of producer -- Modification or assembly that increase price by 10%

– Greater of 50% revenue test still applies

Letter No 201508350L, Texas Comptroller of Public Accts Aug 12,2015

Tax Rate

• Revenue targets tax reductions

• North Carolina

– 6.9% (2013); 6% (2014); 5%(2015)

– 4% and 3% rates possible if revenue goals met

– 4% goal met for 2016 tax year

– 4% now codified

– 3% remains with revenue target.

• District of Columbia

– 9.4% with revenue targets reached

– Further reductions possible

Tax Rate

Connecticut

– Tax surcharge

• Applies to taxpayers

– Gross income > $100M

– Filing combined or elective unitary returns prior to 2016 tax year

– Filing combined unitary returns for years after 2016

• Extends 20% surcharge through 2018

• 2018/2019 – 10% surcharge

Tax Rate

Illinois

– Decreased from 7% to 5.25%

– Additional replacement tax still remains at 2.5% resulting in a combined rate of 7.75%

Texas

– Permanent reduction of tax rates by 25%

– 2016 reports (based on 2015 accounting year) reduced from

• .5% to .375% (wholesalers & retailers)

• 1.0% to .75% (all others)

Tax Rate

New York – Qualified New York manufacturers are eligible for a 0% tax rate

– Technical correction • Restricts the type of property eligible in the “principally engaged in

manufacturing” test

• Applied at the combined return level.

New York City

– Graduated rate – Companies with less than $3 million of allocated business income up to 8.85%

– Five brackets added for fixed minimum tax for corporations with greater than $50M receipts. Brackets now have a $200,000 maximum

Tax Rate

• Other tax rate adjustments • New Hampshire

– BPT -

» 2016 – reduced from 8.5% to 8.2%

» 2017 - 7.9%

– BET –

» 2016 reduced from .75% to .72%

» 2017 - .675%

• Arizona – 6% decreases to 5.5% for 2016

• Indiana – 7% decreases to 6.5% for 2016

• New York – 7.1% decreases to 6.5% for 2016

• Rhode Island – 9% decreases to 7% for 2015

• Rhode Island – $500 Minimum tax decrease to $450 (2016)

Agenda


Tax Credits

Connecticut

– Public Act 15-244 limited credit use to 50.01% of tax liability for 2016

– S.B. 1601 increase percentage limitation for future years and allow additional use for certain credits (i.e. R&D) • 2016 – 55%

• 2017 – 60%

• 2018 – 65%

• 2019 – 70%

Tax Credits

Wisconsin

– Jobs tax credits and economic development tax credits can not be awarded after Dec 31, 2015

– Business development credit created.

• Based on wages, training costs and real and personal property investments

• Refundable

– Manufacturing and agriculture credit • 2015 reduced from 5.526% to 5.0125%

• 2016 increase to 7.5% scheduled

Agenda


Net Operating Losses

Connecticut

– Net operating losses are limited to 50%

– 2017 losses over $6B have special provisions for utilizing losses previously generated prior to 2013

– S.B. 1601 allows taxpayers to make election for 2015


New York

– Net operating losses are now computed on a post-apportionment basis • Utilizes a prior net operating loss (PNOL) conversion for losses

generated prior to 2015

• Provides new ordering rules for purposes of applying NOL deductions

• May elect to forego three-year carry back of NOL


New York City

– Limitation of deduction of NOLs in any tax year to those NOLSs that have the same source year as the NOLS deduction by the taxpayer on its federal return for the same year

– Charitable deduction applies same principles of NOL

Plasmanet Inc. New York City Tax Appeals Tribunal, Administrative Law Judge Division TAT(H) 12-17(GC) Sept. 29,2015


Pennsylvania

– Net operating loss limitations to the greater of 12.5% of income or $3 million violated Uniformity Clause

Nextel Communication of the Mid-Atlantic, Inc. v. Pennsylvania Commonwealth Court No. 98 F.R. 2012 Nov. 23, 2015


Louisiana

– Carry back of three years is eliminated

– Carry forward

• Increased from 15 to 20 years

• Limited to 72% of loss incurred in preceding year

– Effective for returns filed after July 1,2015

What happens to the remaining 28%???

Agenda


Franchise Tax

Pennsylvania

– Proposed phase out of Capital Stock and Foreign Franchise Tax now FINAL.

– Entities filing franchise only returns should mark 2015 returns as “Final Return”

Gross Receipts Tax

Nevada Commerce Tax

– Businesses with Nevada-sitused gross revenue > $4M is required to file a commerce tax return

– Imposed corporations, partnerships, LLC and LLP

– Separate company filing

– Some exempt business entities including passive entities

– Tax rates vary by industry taxpayer is engaged

– Voter referendum possible

Sales Tax

Alabama

– Quill Corp. v. North Dakota - Physical presence required in order to establish nexus

– Direct Marketing Association v. Brohl

• Justice Kennedy – “legal system should find an appropriate case” to re-examine Quill.

– Alabama regulation requires out of state sellers to collect and remit sales tax on remote sellers in absence of presence in the state.

• Effective January 1, 2016

Sales Tax

Alabama

– Required if two conditions met • Prior calendar sales are greater than $250,000

• Seller performs one or more activities under Alabama Code Section 40-23-68(b)

– Provides taxpayers with simplified Sellers’ Use Tax remittance Program to collect and remit using one standard rate (8%)

– Allow buyers to claim refund/credit for overpaid taxes paid

Sales Tax

Remote Seller Nexus

– States continue to enact provisions

• Michigan

• Tennessee

• Nevada

• Ohio

• Vermont

– Language is not always consistent

• Click through nexus

• Affiliate Nexus

• Both click through and affiliate nexus

Tim Clancy, CPA

Windham Brannon P.C. - Atlanta

[email protected]

678.510.2804

Mark Coles

Windham Brannon P.C. – Atlanta

[email protected]

678.510.2776

mailto:[email protected]

mailto:[email protected]

2015 state tax developments - windham brannon wb state develo… · 2015 state tax developments ......

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