state corporate income apportionment: key...

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State Corporate Income Apportionment:

Key Fundamentals and Legislative Trends

TUESDAY, MAY 30, 2017, 1:00-2:50 pm Eastern

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May 30, 2017

State Corporate Income Apportionment

Barry H. Horowitz, CPA, MST, Partner

WithumSmith+Brown, New York

[email protected]

Akash Sehgal, Partner

Green Hasson Janks, Los Angeles

[email protected]

Stephen Basiaga, JD, LLM

WithumSmith+Brown, Princeton, N.J.

[email protected]

Frances Ellington, Tax Manager

Green Hasson Janks, Los Angeles

[email protected]





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© 2017 Green Hasson & Janks LLP & WithumSmith+Brown, PC. All Rights Reserved. Both Are Independent Member Firms of HLB International. 5

State Corporate Income Apportionment Fundamentals

Presented By: Barry Horowitz Stephen Basiaga Akash Sehgal Frances Ellington

May 30, 2017


Akash Sehgal

Partner, Team Leader of SALT

Green Hasson Janks

Frances Ellington

CPA, SALT Manager

Green Hasson Janks


Barry H. Horowitz

CPA, MST, Partner, Team Leader of SALT

WithumSmith+Brown, PC

Stephen Basiaga

J.D., LL.M. Tax, SALT Sr. Associate

WithumSmith+Brown, PC


Table of Contents

I. Apportionment Formulae Key Concepts

II. Sales, Property & Payroll Factors

III. Trend to Single Sales Factor Apportionment

IV. Other Elements of Apportionment

V. Market-Based and Cost of Performance Sourcing of Services and Intangibles

VI. Sourcing of Sales Involving Common Carrier Delivery

VII. Throwback and Throwout Rules

VIII.Income Tax Apportionment Industry Rules

IX. Gillette and its Progeny’s Impact on the Multistate Tax Compact (MTC)

X. Legislative and Judicial Updates


Apportionment Formulae Key Concepts


Allocation and Apportionment

• How do you determine how much income is taxable in one state versus another?

• The states generally provide two mechanisms for attributing a taxpayer's income to the various states in which it is taxable: allocation and apportionment.

• Nonbusiness income is “nonapportionable” or allocated to a specific state.

• Business income is “apportionable” based on representative factors in a state.


Allocation

• Non-business income is unrelated to the taxpayer’s trade or business

• The facts and circumstances of the income typically provide support for this though may be challenged by state authority

• Examples include: ─ Capital gains from the sale of an investment unrelated to day-to-day

operations of the taxpayer

─ Royalties from tangible personal property unrelated to the trade or business of the taxpayer


Allocation Sourcing

• Allocation assigns an income item to the source state.

• Capital gains and losses, dividends, royalties, and other similar income is generally allocated to the taxpayer’s commercial domicile.

• Rental income is typically allocated to the location of the real or tangible property being rented.


Apportionment Income

• Business income is related to the taxpayer’s trade or business

• Typically all income is business income unless proven otherwise

• The Transactional Test & Functional Test ─ Transactions and activity in the regular course of business

─ If the acquisition, management, and disposition of property constitute integral parts of the regular business operations, then the corresponding income is business income


State Apportionment Calculations

• The Traditional Formula: Payroll / Property / Sales apportionment calculation, equally weighted ─ Payroll Within/Payroll Everywhere (e.g. 100%)

─ Property Within/Property Everywhere (e.g. 100%)

─ Sales Within/Sales Everywhere (e.g. 50%)

• 100% + 100% + 50% = 250%

• 250% / 3 = Apportionment Factor of 83.33%


Corporate Versus Flow-through Apportionment Variations

• Many states altering their apportionment methodology for corporate purposes often time maintain their prior entity-level apportionment formula for pass-through entity activity

• States such as New York and New Jersey have different apportionment formulas and sourcing methodologies for corporations and pass-through entities (i.e. market-based, single sales factor versus cost of performance, three-factor formula for pass-through entities

• Attention should be paid to not rely on corporate apportionment and sourcing treatment when evaluating a pass-through entity


Sales, Payroll, & Property Factors


State Corporate Apportionment Calculations • Many states still use some version of the Payroll /

Property/Sales apportionment calculation.

• Equal sales weighting: AK, DE, HI, KS, LA, MO, MT, ND, NM, and ND

• Sales only: CA, CO, CT, DC, GA, IA, IL, IN, LA, ME, MI, MN, NE, NJ, NYS, NYC (phase-in by 2018), OR, PA, RI, SC, TX, UT, and WI

• With other states, sales have added weight in their respective three-factor formula.


Property Factor

• The property factor contains in some combination 1) owned realty; 2) owned personalty; 3) rented realty and 4) rented personalty

• Traditionally a component of most states apportionment formulae, following the sustained constitutionality of Iowa's single-factor sales formula in Moorman Mfg. Co. v. Bair, 437 US 267, 98 S. Ct. 2340 (1978), many states abandoned the traditional three-factor formula for formulas weighted heavily, if not exclusively, by sales

• The property factor has decreased in significance, if not in its entirety, from many states' apportionment formulas.


Property Factor

• The states generally have recognized that it is distorting to include in the property factor for apportionment purposes property that produces allocable—rather than apportionable—income

• Intangible property is generally excluded from the property factor, as states historically excluded intangible income from the apportionable tax base, in order to prevent apportionment distortion

• As a consequence, insofar as states allocate rents and royalties from real and tangible personal property, or gains from the sale or disposition of such property, they often exclude such property from the property factor


Payroll Factor

• The payroll factor, which is somewhat more varied throughout the United States than the property factor, trends towards the UDITPA definition: ─ “compensation” (which is the usual term employed by the statutes

for the payroll factor) as “wages, salaries, commissions and any other form of remuneration paid to employees for personal services.”

─ Other state apportionment laws adopt essentially the same language ─ These provisions are modeled after the definition of “wages” in the

Federal Unemployment Tax Act, and state taxing authorities generally construe them in accordance with the IRS's interpretation of that act as embracing all compensation for services as an employee whether paid in cash or in kind, which is treated as gross income for federal income tax purposes


Payroll Factor

• Broad categories that states use in computing the payroll factor include: (1) office location; (2) time spent in-state; and (3) pay earned in-state

• Special rules are typically applied in the case of loaned employees, shared employees, independent contractors, and the use of a common paymaster


Sales Factor • The terminology identifying the sales or receipts factor varies among

the states has a much broader scope than receipts from sales of tangible personal property

• The Sales Factor typically includes receipts from services, rentals, royalties, sales of stock, and business operations generally, at least in the absence of some specific statutory or regulatory limitation on its scope

• Under UDITPA it covers “all gross receipts of the taxpayer not allocated” as nonbusiness income

• The universe of receipts included in the receipts factor is generally defined by reference to the receipts that give rise to apportionable income.


Sales Factor Sourcing

• Sales factor sourcing to a state depends on the type of revenue and specific rules in the state

• Many states have an “occasional sale” rule

─ Exclude from the sales factor in order to prevent apportionment distortion

─ Net gain/loss is still included in the apportionable tax base as business income


Sales Factor Sourcing

• Destination sourcing (TPP)

─ General rule for sales of inventory

• Market sourcing (services or intangibles)

─ Based on where the customer receives the benefit

• Cost of performance sourcing (services or intangibles)

─ Based on costs of income-producing activity in the state


Trend to Single Sales Factor Apportionment


The Move to a Single Sales Factor • By downgrading the effect of the property and payroll factors and

upgrading the effect of the sales factor, it is said that this makes it possible to “export the tax.”

─ The out-of-state manufacturer who sells in the state will pay more tax and the in-state manufacturer who sells out of the state will pay less tax than would be the case under an evenly weighted three-factor apportionment formula.

• Maintains headquarters of company within the State

• Iowa was the first state to carry this theory to the extreme by adopting a single-factor formula consisting of only a sales factor.

• Iowa successfully defended its use of a single sales factor in the U.S. Supreme Court.


The Move to a Single Sales Factor

• A number of states currently double-weight the sales factor, while some other states have added even more weight to the sales factor. Some states have followed Iowa and use a 100 percent sales factor apportionment formula.

• Certain states often use the single sales factor for its industry specific and special purpose application and elections. For example, Massachusetts allows manufacturing corporations to apportion income using a single-factor formula based on sales

• Connecticut requires a single-factor gross receipts apportionment formula for manufacturers starting with calendar quarters ending on or after July 1, 2001, and for broadcasters for income years beginning on or after Oct. 1, 2001.


Not All States Benefit from Single Sales Factor

• In contrast to the trend toward providing more weight to the sales factor, there are some instances where states have denigrated the sales factor.

• A state in which natural resources are produced for export may believe that the sales factor draws too much of the tax base away from the state and leaves it inadequately compensated for the social and environmental costs of extractive industries

─ Thus, Utah departed from the destination theory of the sales factor for a mining corporation, and Alaska enacted a hybrid method for oil companies whereby Alaskan production income was determined by separate accounting


TOP TEN MOST BUSINESS FRIENDLY STATES

1. Wyoming (No Corporate Income Tax) 2. South Dakota (No Corporate Income Tax) 3. Alaska (3-Factor Formula) 4. Florida (3-Factor Formula with double –weighted sales) 5. Nevada (No Corporate Income Tax) 6. Montana (3-Factor Formula) 7. New Hampshire (3-Factor Formula with double –weighted sales) 8. Indiana (Single Sales Factor) 9. Utah (can elect either 3-Factor Formula equally weighted or double –weighted sales) 10. Oregon (Single Sales Factor)


TOP LEAST BUSINESS FRIENDLY STATES

41. Louisiana (Varies by industry; largely single sales factor) 42. Maryland (3 Factor – Double Weighted Sales) 43. Connecticut (Single Sales Factor) 44. Rhode Island (Single Sales Factor) 45. Ohio (CAT tax – receipts-based factor) 46. Minnesota (Single Sales Factor) 47. District of Columbia (Single Sales Factor) / Vermont (3 Factor – Double Weighted Sales) 48. California (Single Sales Factor) 49. New York (Single Sales Factor) 50. New Jersey (Single Sales Factor)


What makes a state good for business?

• The absence of a major tax is a common factor among many of the top ten states. Property taxes and unemployment insurance taxes are levied in every state, but there are several states that do without one or more of the major taxes: ─ the corporate income tax;

o Wyoming, Nevada, and South Dakota have no corporate or individual income tax (though Nevada imposes gross receipts taxes);

o Florida has no individual income tax

─ the individual income tax, or o Alaska has no individual income or state-level sales tax

─ the sales tax o Alaska, New Hampshire, Montana, and Oregon have no sales tax.


Other Elements of Apportionment


Combined Versus Consolidated • A consolidated state income tax return is “typically,” but not

always, one return filed by an affiliated group that also files federal consolidated returns

• A combined report is filed by a group of commonly owned corporations or businesses that constitute a unitary business because the basic operations of the entities are integrated and interrelated.

• Combined and consolidated filings can be required or elective, depending on the state and the taxpayer’s industry.

• Each state has its own rules and reporting style.


Unitary Businesses • A unitary business can be required to include all of its unitary affiliates in a

state income tax return even those affiliates that do not have nexus in a state.

• As concerns combined reporting, the unitary business principle defines which affiliates are included in the reporting group

• Beginning in 1980, the U. S. Supreme Court handed down a number of decisions defining the constitutional scope of the unitary business principle.

─ Container, Mobil, ASARCO, Woolworth, Allied-Signal, and MeadWestvaco

• The unitary tests that have developed from these cases are: ─ Functional integration, economies of scale, and centralized management ─ Flow of value, or substantial mutual interdependence and unity of ownership


Flowthrough Apportionment

• Unitary ─ In general, unitary flow-through factors are added to the factors of the

taxpayer to create a combined apportionment factor.

• Non-unitary ─ If such entities are non-unitary, then the state source income is typically

calculated that the flow-through level and only that post-apportioned amount is taxed. The relevant apportionment factors are not combined to apportion additional income to the jurisdiction.

─ In essence, allocation of amounts that are nonapportionable.


Water’s Edge Versus Worldwide

• Worldwide ─ Worldwide combined reporting generally includes the factors of an

entire unitary group, regardless of where the member was incorporated or what countries the member conducts business in

─ Required or allowed in AK, CA, CO, CT, DC, ID, IL, MA, ME, MT, ND, OH, UT, and WV

• Water’s Edge ─ Water’s-edge combined reporting does not generally include

income/sales/payroll/property from group members incorporated in foreign countries or that conduct most business outside the US.

─ Required or allowed in AZ, CA, CO, CT, DC, HI, ID, IL, IN, KS, MA, ME, MI, MN, MS, MT, NC, ND, NE, NH, NY, OR, TX, UT, VA, WI, and WV


Eliminations

• For factor purposes, intercompany sales and other intercompany revenue items are eliminated in computing the numerator and denominator of the sales factor.

• Property or payroll (or appropriate portion thereof) that relate to such receipts are similarly excluded ─ Example: Massachusetts - Where items of gross income

are excluded from the federal gross income of a combined group member, the gross receipts to which such items of gross income are directly attributable are similarly excluded from the numerator and denominator of the member's sales factor.


Market-Based and Cost of Performance Sourcing of Services and Intangibles


Market-Based Sourcing

• For services and intangibles, how do you define the “market”?

─ Receipts are included in the numerator of a taxpayer’s sales factor based on location of either:

oWhere customers derive benefits from the service

oWhere services are performed

oWhere intangibles are used

oWhere customers are located


Market-Based Sourcing

• Delivery v. Receipt v. Benefit of a service

─ Are they different?

• What happens when the market for a service or an intangible is not identifiable?

─ Reasonable approximation

• States with Market Rules:

─ AL, CA, DC, GA, IL, IA, ME, MD, MA, MI, MN, NE, NY, OK, PA, RI, UT, and WI


Benefits and Limitations

• Benefits

─ Belief that “market sourcing is more aligned to the intended purpose of the sales factor”

o Reflection of the contribution of the market to the taxpayer’s income

─ May favor in-state businesses

o Based on Activity level, taxpayer would not have to source income to the headquarter state

o Shift of the tax burden to out-of-state taxpayers



• Limitations

─ States have different mechanics defining the term “Market”

─ Likely to create administrative problems and lack of state uniformity

─ Difficulty determining where the customer receives the benefit of the service


Cost of Performance (COP) Sourcing

• Sales, other than sales of tangible personal property, are in this state if:

─ The income-producing activity is performed in this state; or

─ The income-producing activity is performed both within and outside this state and a greater proportion of the activity is performed in this state than any other state based on costs of performance


Income-Producing Activity

• As defined by the MTC, the act or acts directly engaged in by the taxpayer for the ultimate purpose of obtaining profit

• Transactional approach – review costs of each individual sales transaction (i.e., OR)

• Operational approach – review operations and income streams (i.e., MA)


Understanding COP Methods

• Two General Methods ─ Preponderance Method

o All-or-nothing ─ Proportionate Method

o Pro-Rata

• How do you measure these methods? What costs are included?

• States with COP Rules: ─ AK, CO, FL, HI, KS, MO, ND, TN, and VA


Comparing COP Methods

• Alaska has a cost of performance “all-or-nothing” approach and over 50% of the costs of income-producing activities are in Alaska

• Colorado has a cost of performance “pro-rata” approach and 30% of the costs of income-producing activities are in Colorado

• In summary, ─ 100% of the receipts are sourced to Alaska

─ 30% of the receipts are sourced to Colorado

= 130% total state-sourced receipts


Direct and Indirect Costs

• Direct: costs that are related specifically to the performance of services under a contract or other arrangement ─ Includes direct material and labor, plus variable overhead

incurred in producing a product

• Indirect: costs not readily identifiable with production of specific contracts or services, but applicable to production ─ Includes overhead allocation for administrative activities



• Time Consuming ─ Based on the amount of income line items to be

reported o Specify related income-producing activity

o Determine location of the income-producing activities and the related costs

─ Independent contractors and limited records may cause issues

─ But if a proper system is created to capture this information, may become a favorable state tax Benefit



• Limitations

─ Cost of Performance Method may not be appropriate for a wide range of industries, including:

oPublishers

oAirlines

oConstruction Contractors

oFinancial Institutions, etc.


Sourcing of Sales Involving Common Carrier Delivery


Destination Sourcing

• For the sale of tangible personal property (“TPP”), dock sales may change the “state source” based on destination or delivery

• Specifically, when an out-of-state purchaser uses its own trucks or hires a third-party common carrier to take delivery of the goods from seller’s loading dock to its place of business in another state.

• Two Rules ─ Place-of-Delivery Rule ─ Ultimate-Destination Rule


Destination vs. Delivery

• Place-of-Delivery

─ Dock sale is attributed to the state in which the property is delivered to the purchaser at the seller’s loading dock

• Ultimate-Destination

─ Dock sale is attributed to the state in which the purchaser is located


Destination vs. Delivery

• McDonnell Douglas Corp v. Franchise Tax Board ─ Maryland Corporation, that manufactured and sold

commercial and military aircrafts and aircraft parts

─ Most of the commercial aircrafts were delivered to taxpayer’s facility in California and Arizona o Customer would arrange for transportation of the aircraft to an

ultimate destination from these facilities

─ These sales would be included in the California sales factor

─ California Court of Appeal held that the sales were not California sales but that of the ultimate state destination.


P.L. 86-272 and Economic Nexus

• Certain economic activity in a state may trigger nexus regardless if substantial activity is deemed in the state by employees or property

• Bright-line thresholds (MTC standard) ─ $50,000 of property (including capitalized rent) ─ $50,000 of payroll ─ $500,000 of sales

• With the sale of TPP, P.L. 86-272 would take priority over any economic nexus statutes


P.L. 86-272 and Economic Nexus

• Use of common carriers may limit contacts with states

─ Specifically, shipped from a point outside the state

• This may allow for P.L. 86-272 to apply despite any economic nexus bright-line thresholds exceeded

• Note, P.L. 86-272 does not apply to service income


California Considerations • Economic Nexus thresholds for 2016

─ $54,771 property or payroll, or $547,711 sales exceeded; OR ─ 25% of total everywhere property, payroll, or sales in California

• Interest, Royalties, and Other non-tangible income is subject to market sourcing ─ Based on certain apportionment factors ─ Location of debtee ─ Individual versus business sourcing

• Special industry rules may determine market measure (i.e., audience for entertainment)


New York State / City Considerations

• New York has an economic nexus threshold should a taxpayer exceed $1 Million in receipts

• New York state and city source sales of services using a market-based methodology

─ Receipts are sourced to New York if the location of the customer is in New York

• Note: New York City does NOT have an economic nexus standard nor follow S Corporation rules (S Corporation follows Passthrough sourcing (COP) rules


Throwback and Throwout Rules


Throwback and Throwout Rules

• A “throwback” rule requires tangible personal property delivered to those states where the taxpayer is not taxable, to be included in the sales numerator of the state where the product was shipped. ─ Essentially, the sales are “thrown back” to the state of

origination.

• With the “throwout” rule, such profits are ignored by

subtracting nontaxable state sales from the sales apportionment denominator. ─ Essentially, “thrown out” of the everywhere sales figure.


Joyce Or Finnigan?

• Sales of TPP shipped or delivered to a state end up in that state’s numerator, if a return is being filed there.

• If a member in a combined group makes sales to customers in a no nexus state where the combined group is filing the combined return, do the sales go into that state’s numerator?

─ In Joyce states, no. ─ In Finnigan states, yes.

• The Finnigan rule for sourcing sales of an affiliated group - the activities of one member of the affiliated group are attributed to all members of the group.

• The Joyce rule states that nexus of one affiliated group member is not attributed to other group members


Joyce / Finnigan is a Sale of TPP Rule

• What if an advertising company that does not have California nexus, but is part of a combined filing in California, provides advertising services for customers in CA?

• Are those sales put in the CA numerator under the Finnigan rule? ─ No.

─ Finnigan only applies to sales of TPP!


Throwback vs. Throwout States

• Throwback: AK, AL, AR, CA, CO, DC, HI, ID, IL, MA, MO, MS, MT, ND, NH, OK, OR, RI, UT, VT, WI, WV

• Throwout: ME, LA

• States without Throwback/Throwout Rules: AZ, CT, DE, FL, GA, IA, IN, KS, KY, MD, MI, NC, NE, NJ, NV, NY, OH, PA, SC, SD, TN, TX, VA, WA, WY


California – Throwback Example

• Sales of tangible personal property are also sourced to California if the property is shipped from an office, store, warehouse, factory, or other place of storage in California, and the taxpayer is not taxable in the state of the purchaser

• Whether the taxpayer is taxable in the purchaser’s state for purposes of the throwback rule is determined under Cal. Rev. & Tax. Cd. § 23101(b), for tax years beginning on or after January 1, 2011. Thus, as of 2011, a taxpayer meeting California’s economic nexus threshold in another state is considered to be taxable in that state for throwback purposes, provided the taxpayer’s activities exceed those protected by P.L. 86-272.

• For tax years beginning before 2011, the taxpayer was required to have a physical presence in a state in order to be considered taxable in that state for throwback purposes.


Maine – Throwout Example

• Receipts from sales of tangible personal property that is delivered or shipped by the taxpayer (regardless of F.O.B. point or other conditions of the sale) to a purchaser within a state in which the taxpayer is not taxable are excluded from both the numerator and the denominator of the sales factor.

• However, a taxpayer must include the sales in the sales factor if any member of the taxpayer’s affiliated unitary group is taxable in the destination state.


Income Tax Apportionment Industry Rules


Income Tax – Industry Rules

• Often, standard apportionment formulas do not fairly represent the activity of a taxpayer in the state.

• States may have a separate formula rule for specific taxpayers, or have a separate sourcing rule for specific revenue streams.

• If no separate rules, “alternative apportionment” provisions may be available.



• For separate formula rules, states may have manufacturers use a three-factor formula when all other taxpayers use a single-sales factor.

• For separate sourcing rules, states may have transportation companies use a ratio of in-state miles in the state to calculate their sales factor.



• Financial institutions and insurance companies typically have special industry rules using deposits, number of clients, or premium dollars in a state.

• Asset management companies use investor location or beneficial owner domicile.

• Other sourcing rules may apply for revenue streams such as broadcasting using audience data as receipts.


Gillette and its Progeny’s Impact on the Multistate Tax

Compact (MTC)


Gillette and the Multistate Tax Compact

• Petition to utilize the Multistate Tax Compact’s three-factor apportionment election in calculating income/franchise tax.

• California, Michigan, Minnesota, Oregon, and Texas have consistently ruled in favor of the state on this issue.


Gillette and the Multistate Tax Compact: California

• On October 11, 2016, the U.S. Supreme Court denied Gillette’s petition for a writ of certiorari to review the California Supreme Court’s decision in The Gillette Company, et al. v. Franchise Tax Board

• In November 2016, the Franchise Tax Board released FTB Notice 2016-03 regarding the processing of refund claims due to the compact election issue.


Gillette and the Multistate Tax Compact: Michigan

• Michigan Legislature enacted PA 282 in September 2014, retroactively rescinding Michigan’s membership in the Multistate Tax Compact and eliminating a taxpayer’s ability to calculate its MBT apportionment formula using the Compact’s equal-weighted three factor formula.

• Taypayers who had filed MBT refund claims during the pendency of the IBM litigation, challenged the retroactive effects of PA 282 as violating their due process rights, among other claims.


Gillette Commercial Operations North America & Subsidiaries et. al. v. Dep’t of Treasury, 870 N.W.2d 926 (2015)

• On Sep. 29, 2015, the Michigan Court of Appeals in Gillette et al. upheld PA 282 and rejected Compact-based MBT refunds claims in many pending cases, holding:

─ The taxpayers have no vested interests in the continuance of tax legislation and under United States v. Carlton, 512 U.S. 26 (1994) the period of retroactivity is rationally related to the Legislature’s legitimate purpose of protecting state revenues.

─ Legislature’s stated legislative goal of correcting a perceived misinterpretation of the application of the Compact provisions and preventing significant revenue loss associated with the error was a legitimate purpose.


Gillette Commercial Operations North America & Subsidiaries et. al. v. Dep’t of Treasury, 870 N.W.2d 926 (2015)

─ The six and a half year period of retroactivity was sufficiently modest relative to prior Michigan precedent and other state and federal court decisions.

• Although the Michigan Supreme Court denied the taxpayer’s appeal request, the taxpayer petitioned the U.S. Supreme Court to review the Michigan court’s acceptance of the state’s retroactive law change.

• On May 18, 2017, the U.S. Supreme Court denied the petitions for a writ of certiorari to review the Michigan Supreme Court’s decision.


Legislative and Judicial Updates


Ohio CAT and Economic Nexus

• In November 2016, the Ohio Supreme Court upheld the constitutionality of the Ohio Commercial Activity Tax factor presence nexus standard for gross receipts.

• In the cases of Crutchfield Corp., Newegg, Inc., and Mason Cos., Inc., the Court concluded that physical presence is not required because Quill does not apply to business privilege taxes, and the factor presence standard complies with Complete Auto’s substantial nexus requirement.

• Physical presence was deemed not required simply because the Quill case was a use tax issue and not a business privilege or gross receipts tax determination.


Apportionment • TN - Tennessee taxpayer may apportion its business income subject to excise

tax and its non-consolidated net worth subject to franchise tax if it also has business activities in another state, and the business activities performed in the other state are substantial enough to give the taxpayer nexus in the other state under Tennessee's definition of substantial nexus, which looks at whether the taxpayer has a certain amount of in-state sales. Tennessee DOR FAQs (Jan. 5, 2017)

• NJ - Receipts excluded from another state’s receipts factor based on a regulatory exclusion for potentially distortive receipts were not required to be thrown out of the New Jersey sales factor. The other state had “the ability to tax” the receipts, but simply chose to exclude the receipts to eliminate distortion. In addition, sales that a state could have required to be thrown back (but were not) were not subject to throw out of the New Jersey receipts factor. Elan Pharmaceuticals, Inc. v. Division of Taxation (N.J. Tax Ct. Feb. 6, 2017).


Sales Factor

• CT and LA Single Sales Factor as of tax year 2016

• DE phasing in Single Sales Factor through 1/1/20

• NC phasing in Single Sales Factor through 1/1/18

• NM phasing in Single Sales Factor through 1/1/18 for manufacturers


Model MTC Regulations • Clarified definition of “apportionable” income

• Narrowed definition of “receipts”

• Removal of equally-weighted factor requirement

• Adopted market-based sourcing for sales other than

tangible personal property (in place of COP)

• Finalized 2/24/17 ─ MT revised law recently to conform with the MTC regulations


Sourcing of Receipts

• CT and LA market-based sourcing as of tax year 2016

• NC expected to enact market-based sourcing for tax year 2017 ─ On 2/16/17, the Rules Review Committee approved the proposed

market-based sourcing rules

• NM S.B.274 would adopt market-based sourcing as of 1/1/18

• OR H.B. 2048 and 2274 would replace COP rule with market-based sourcing effective 1/1/18


Sourcing of Receipts

• CO - The statutory apportionment formula did not fairly represent a taxpayer’s activity in Colorado when the taxpayer had no property or payroll in Colorado and no sales sourced under the statutory method, but the taxpayer received hundreds of millions of dollars in royalties from Colorado sources.

─ However, because the taxpayer had substantial business activities in other states, the Department’s proposed formula–using only the retail entity’s sales–was not reasonable and the court ordered the Department to include the taxpayer’s own property and payroll in the alternative formula. Target Brands, Inc. v. Colo. Dep’t of Revenue (Colo. Dist. Ct. Jan. 27, 2017).


Throwback and Throwout

• LA introduced new throwout rule as of tax year 2016

• IN eliminated throwback rule as of tax year 2016


State Audit Areas for Concern

• States are desperate for money, and have increased their audit frequency and assessment aggressiveness

• Significant issues being focused on taxing authorities ─ Nexus

─ Unitary Groups

─ Allocation and Apportionment

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