May 8, 2013

Multi-state Tax Update – Convergence 2013 Dallas CPA Society

Mike Williams and Melissa Wofford

Income and Franchise Tax

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Apportionment of sales other than sales of TPP

Cost of Performance• Direct costs determined in a manner consistent with

generally accepted accounting principles and in accordance with accepted conditions or practices in the trade or business of the taxpayer to perform the income producing activity which gives rise to the particular item of income. Included in the taxpayer’s cost of performance are taxpayer’s payments to an agent or independent contractor of the performance of personal services and utilization of tangible and intangible property which give rise to the particular item of income

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Apportionment of sales other than sales of TPP

Market sourcing of sales of services• Receipts are attributed to where the services are

delivered, and not where the services are performed• In general, delivery can occur where the customer is

located or where the benefit of the services are received

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Apportionment of sales other than sales of TPP

Cost of Performance Considerations• How are direct costs defined?• Should independent contractors be

considered?• Indirect costs• GAAP• Marketing activities

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Apportionment of sales other than sales of TPP

- Recent cost of performance decisions• AT&T v. Comm (MA App. Ct. 2012)• JRS Distrib’n Co. v. Treasurer (MI Ct. of

Appeals 2012)• Michiana Metronet v. Treasurer (MI Ct. of

Appeals 2012)

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Alternative Apportionment

Uniform Division of Income for Tax Purposes Act (UDITPA) Section 18

• Mississippi – Equifax Inc. v. DOR• Tennessee - Vodafone Americas Holdings,

Inc. v. Roberts• Indiana – Letter of Finding 02-20110473• Illinois – IT-13-0001

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Alternative Apportionment

3 Factor Challenges• California - Gillette• Michigan - IBM• Texas – Graphic Packaging

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Current Trends

Texas – Franchise Tax

- COGS – Comptroller revised revised rule for deductions

- Governor Perry’s proposals

- Legislative session set to conclude in May

- Flurry of lawsuits filed

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Current Trends

Texas – Compensation Deduction

- Winstead PC v. Combs, No. D-1-GN-12-000141

- Statute allows a taxpayer to deduct the cost of all benefits to the extent deductible for federal income tax purposes

- District Court found regulation exceeded the Comptroller’s statutory authority

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Current Trends

California – Single sales factor

- All tax years after 1/1/13 requirement to apportion income using single sales factor for all apportioning businesses

- Partnerships – rule applies regardless of the form of ownership and unitary relationships

- Partnerships with non-resident partners should take this into consideration for ES/withholding

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Current Trends

California – attribution of nexus among partners

- SUP, Inc., Case No. 571262 (adopted Nov. 14, 2012)

- Nevada general partner in a Nevada partnership subject to CA min franchise tax

- A partnership is actively managed by its general partner at the location of the general partner and the activities of the partnership are attributed to a general partner

- Limited partner?

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Current Trends

District of Columbia – Statute of Limitations

- Office of Tax and Revenue v. Sunbelt Beverage LLC; No. 10-AA-1331

- OTR could not issue and assessment against a taxpayer three years after the taxpayer had filed a return on an incorrect form

- D-30 v D-65

- The form filed by the taxpayer represented a good faith attempt to file a return and set forth the necessary information to correctly determine the amount due

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Current Trends

Kentucky – Intercompany Management Fees

- HB 440 (March 26, 2013)- passed the house waiting for signature

- Planning benefit

- Company could deduct from its corporate income tax base payments made to a related party for management services (e.g. accounting, payroll, insurance, data processing, etc.)

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Current Trends

Louisiana - UTEL Com, Inc. and UCOM, Inc. tax cases. 

- A holding company was not subject to Louisiana franchise tax because the company lacked a physical presence in the state

- The companies only presence in the state is by virtue of a limited partnership interest in a company conducting business in the state as a partnership

- March 2012, the Louisiana Supreme Court denied the review of these tax cases. 

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Current Trends

New Mexico – HB 641-Tax law changes

- Corporate income tax rate reduced from 7.6% to 5.9% over a five year period

- Beginning 2014, mandatory unitary combined filing requirement for retailers making retail sales of goods in a facility of more than 30,000 sq ft under one roof

- Elective single sales factor apportionment will phase in over five years for manufacturers

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Current Trends

Oklahoma – corporate income tax capital gains

- CDR Systems Corporation v OTC, Case No. 109886

- OK capital gains deduction unconstitutional

- OK companies were granted preferential treatment over non-OK companies in violation of the Commerce Clause

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Current Trends

Multistate Tax Commission – Article IV

- Business/Non-business income

- Double-weighting of sales factor

- Definition of Receipts for sales factor purposes

- Sales other than sales of tangible personal property

- Alternative apportionment rules

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State Amended Returns for RARs

- No uniform state statutes/rules

- When are reporting deadlines – 30, 60, 90, 120, 180 or more

- Final determination date is critical

- Penalty and interest

- Documentation

- Expect notices!

- Other complications or complexities

- Plan, plan, plan

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Series LLCs

- A form of limited liability company that provides liability protection across multiple series each of which is theoretically protected from liabilities arising from the other series

- Federal Proposed Reg 301.7701(a)(5)

- State adoption

- Limitations

- Planning

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Sales and Use Tax

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Proposed Federal Legislation - Nexus

Marketplace Fairness Act of 2013 • Grants states authority to compel remote sellers

(online and catalog retailers) to collect and remit sales/use tax

• The Act requires states to simplify their sales tax laws

• States are eligible to require collection by remote sellers by either:

- Being SST member state

- Implementing the Act’s minimum simplification requirements

• Small Seller Exception – applies to remote sellers with total gross annual revenue of less than $ 1 million

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Click–through Nexus

New York – “Amazon tax”

- an out of state seller soliciting sales through an independent contractor, agent, or other representative if the seller enters into an agreement with a New York resident for a commission.

- the representative directly or indirectly refers potential customers to the seller whether by link, internet website or otherwise (click-through nexus)

- gross receipts total more than $10,00023

Click-through Nexus

Kansas approved legislation enacting click-through nexus on April 16, 2013

- goes into effect 90 days after enactment

- a retailer is presumed to be doing business in the state when entering into an agreement with a Kansas resident for a commission

- refers potential customers by: link, internet website, telemarketing, in-person oral presentation

- cumulative gross receipts of $10,000/year24

Click-through Nexus

Georgia has passed legislation implementing click-through nexus on April 19, 2012

- has the same language as other states regarding using “click through” marketing using representatives in Georgia

- exception: if gross sales from referrals by click-through is under $50,000 annually and attend trade shows solely for less than 5 days in Georgia

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Cloud Computing - Overview

• Software as a Service (“SaaS”)

• Application Service Provider (“ASP”)

• SaaS and ASP are new business models for software delivery (“cloud computing”)

• Software applications provided over the internet as a service rather than license of tangible personal property

• Allows customers to access software applications over the internet through a third party provider

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Cloud Computing - Overview

• Sales Tax Implications/Questions

- does the provider have nexus?

- is it a sale or license of canned software or performance of a service?

- is the “true object” test applicable?

- if a sale of service, is the service taxable?

(information or data processing services)

- if a sale of software, is it canned or custom software?

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Cloud Computing – Recent State Rulings

Idaho – HB 243 enacted on April 3, 2013

- provides that software accessed through the internet is not tangible personal property for sales/use tax purposes and therefore, is exempt

Massachusetts – issues Working Draft Directive 13-XX on February 7, 2013

- if “true object” of transaction is access to software then transaction will be taxable.

- if “true object” of transaction is to obtain a benefit of third party’s services then not taxable.

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Cloud Computing – Recent State Rulings

New Mexico – Ruling No. 401-13-1 (1/31/13)

- out of state’s business’ sales of online software on subscription basis to users in New Mexico is taxable for gross receipts tax.

- transactions were sales of intangibles sourced to location where internet was accessed

- consulting and data analytic services performed outside New Mexico are exempt even if product initially used in New Mexico

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Cloud Computing - Texas

Cloud Computing Services: allows customers to access software and used on company’s servers through the cloud

- customers are not required to use specific software nor download any software

- no software license is sold or transferred

- cloud computing billed based on usage

- Taxable as data processing services which includes “computerized data and information storage or manipulation.”

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Resale and Exemption Certificates

Resale and Exemption certificates are getting looked at closer by state auditors

Auditors verifying fully completed with correct information and wording

States issuing specific registration numbers and/or certificates instead of blank forms (e.g., Texas agriculture exemption, Louisiana resale and manufacturing exemption forms)

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Biography

Mike Williams (972) 764-7025, mike.williams@mcgladrey.com

Mike is the Dallas SALT practice leader for McGladrey LLP and serves in various

leadership roles with the firm. Mike has over 19 years experience in public accounting

with approximately 17 years experience in the state and local tax area. Prior to joining

McGladrey LLP in October 2006, Mike spent 9 years practicing with a Big 4 accounting

firm. He has assisted clients in the manufacturing, technology, retail, real estate,

distribution, energy and service industries. Mike’s extensive experience includes Texas

franchise tax consulting, restructuring implementations, voluntary disclosure agreement

negotiation, merger and acquisition consulting, tax compliance management, refund

reviews, nexus studies, state audit defense, and state income tax provision consulting. 

Professional Affiliations and Credentials

American Institute of Certified Public Accountants (AICPA)

Texas Society of Certified Public Accountants (TSCPA)

State Taxation Committee of the Texas Society of Certified Public Accountant

Texas Taxpayer and Research Association

Louisiana Society of Certified Public Accountants

Association for Corporate Growth

Education

Bachelor of Science in Accounting – Louisiana State University

Masters in Business Administration – University of New Orleans32

Biography

Melissa Wofford (972) 764-7042, melissa.wofford@mcgladrey.com

Melissa is a director in McGladrey LLP’s State & Local Tax Practice in Dallas,

Texas. She specializes in sales and use tax consulting. She assists

companies with their sales and use tax issues in all states, with a focus in Texas,

Oklahoma, Arkansas, and Louisiana. Melissa has over thirteen years of experience

in the state and local tax area working with a wide range of industries including

manufacturing, food processing, retail, restaurant, distribution, service, oil and

gas, financial institutions, healthcare, and entertainment. Examples of expertise in

the state and local tax area include: audit defense, refund reviews, reverse sales

and use tax audits, multi-state sales and use tax planning, managed audits and

voluntary disclosure agreements

 

Professional Affiliations and Credentials

Certified Member of the Institute for Professionals in Taxation (CMI)

 

Education

BS in Accounting, Texas Tech University – Lubbock, TX

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