Whats Happening Doug Lindholm & William McArthur, Jr. Council on State Taxation TE Connectivity Fred Marcus Principal Horwood Marcus & Berk Chartered Matt Lauer Ginny Buckner Kissling President, U.S. Operations and Principal Ryan, LLC Savannah Guthrie Hosted by & Chris Matthews & Chuck Todd with Special Thank You Michael Garcia Producer Ryan, LLC Dallas, Texas Program Overview Dale Busacker Minnesota Michael Yopp Tennessee, Kentucky Judge William Thompson Alabama Brian Walsh Illinois, Indiana, Wisconsin Maureen Pechacek Washington, Oregon, Nevada Doug Sigel Texas Fred Nicely Ohio Program Overview Andres Vallejo California Daniel Stanley Michigan Jonathan Block Maine, New Hampshire Mitchell Newmark New Jersey Jason Zorfas Massachusetts Dick Genetelli New York, New York City F EATURING S PECIAL G UESTS : Mr. Doug Sigel Administrative Partner Ryan Law Firm, LLP Austin, Texas Ms. Maureen Pechacek, CPA Partner PricewaterhouseCoopers LLP Minneapolis, MN Mr. Fred J. Nicely, Esq. Tax Counsel Council On State Taxation Washington, DC F EATURING S PECIAL G UESTS : Mr. Richard Genetelli Managing Director Genetelli Consulting Group New York, New York Mr. Jason Zorfas Executive Director EY LLP Boston, Massachusetts Mr. Mitchell Newmark Partner Morrison & Foerster LLP New York, New York PowerPoint Presentation To access this presentation, go to: Minnesota Developments Mr. Dale Busacker Director, State and Local Taxes Grant Thornton LLP Minneapolis, Minnesota Corporate Franchise Tax MTC Three-Factor Election Kimberly-Clark Corporation v. Commissioner of Revenue, Minn. Tax Court June 19, 2015 In 1983, the Legislature adopted the MTC Compact. Minnesota then allowed business taxpayers to elect to use equally-weighted three factor apportionment or to apportion income based on 70% sales, 15% property, and 15% payroll. Minnesota also used cost of performance to determine the sales factor for services. The 1987 Legislature repealed Articles III and IV of the MTC Compact and repealed the election to use the equally-weighted three factor apportionment formula. The 1988 Legislature adopted market-based sourcing for the sales factor for services. Corporate Franchise Tax MTC Three-Factor Election Cont. Kimberly-Clark Corporation v. Commissioner of Revenue, Minn. Tax Court June 19, 2015 (cont.) The Tax Court held that a taxpayer could not use the Multistate Tax Compacts equally-weighted three-factor apportionment formula to apportion its income to Minnesota. The Tax Court rejected the taxpayers argument that although Minnesota amended its version of the Compact to eliminate Articles III and IV of the Compact (relating to apportionment) in 1987, Minnesota was still obligated to allow taxpayers to use the Compacts three-factor apportionment formula during the tax years at issue until it formally repealed the Compact in The Tax Court held that while the Compact was a contract, it was a contract which Minnesota could change. The taxpayer has appealed this decision to the Minnesota Supreme Court. Corporate Franchise Tax Unitary Business and NOL Carryforwards SunGard Data Systems, Inc. v. Commissioner of Revenue, Minn. Tax Court - August 11, 2015 The SunGard group is headquartered in Philadelphia and has over 50 subsidiaries. Each entity with nexus with Minnesota filed on a separate legal entity basis. The Revenue Department audited the 2007, 2008, and 2009 tax years and assessed additional tax on a unitary basis. The Department also recomputed net operating loss carryforwards from closed years, 2005 and 2006, to reflect its determination that SunGard had been operating a unitary business during these years. Corporate Franchise Tax Unitary Business and NOL Carryforwards Cont. SunGard Data Systems, Inc. v. Commissioner of Revenue, Minn. Tax Court - August 11, 2015 The Tax Court held that the taxpayer had provided insufficient evidence to refute the Department's determination that SunGard had been operating a unitary business. The Tax Court also upheld the Department's authority to re- compute the NOL carryforwards. The Tax Court took note that in May 2015, the New York Tax Appeals Tribunal had agreed with SunGard that it was operating a unitary business. Pending Corporate Franchise Tax - Nexus The Scott Fetzer Co. v. Commissioner of Revenue, Docket No Pending before the Minn. Tax Court Kirby Company is a division of The Scott Fetzer Company. Kirby is in the business of selling vacuum cleaners to independent distributors. The independent distributors sell the vacuum cleaners to dealers. The dealers sell the vacuum cleaners to end consumers. Kirby requires the independent distributors give a warranty with the vacuum cleaner sales. Kirby has never paid Minnesota corporate franchise taxes under the basis that the companys only activity in the state is the solicitation of orders of tangible personal property and this activity is protected by Public Law The Revenue Departments position is that nexus is established due to the warranty repair services which are provided by the independent distributors. Individual Income Tax Nonresident Corporate Board Members Revenue Notice August 25, 2014 Revenue Department's Position on General Rule The board member of a Minnesota-headquartered corporation is conducting a business. The income is apportioned to Minnesota using only the sales factor starting in The board member is providing a service which is included in the Minnesota numerator if the service is received here. When the board meeting is held in Minnesota, the DOR takes the position that the service is received in Minnesota because the ordering office (i.e., corporate headquarters) is in Minnesota. Calling in to a meeting held in Minnesota is considered to be attending a Minnesota meeting. Individual Income Tax Nonresident Corporate Board Members Cont. Revenue Notice August 25, 2014 (cont.) Revenue Department's Special Rule Announced in Revenue Notice The nonresident board member can use the time-spent method to allocate board compensation to Minnesota. The time-spent method can be used if the board member serves on only one or two boards including Minnesota and non-Minnesota-headquartered corporations and any nonprofit boards. If the nonresident serves on three or more boards, the nonresident may petition the DOR to use the time-spent method. Individual Income Tax Nonresident Corporate Board Members Cont. HF 2179/SF 2028 Not Passed Under these bills, nonresident board members would use the time-spent method to apportion their income to Minnesota. The time-spent method would apply to all nonresident board members including those who serve on three or more boards. The provisions of these bills were included in both the House and Senate versions of HF 848, the 2015 Omnibus Tax Bill which remains in conference committee. Sales Tax Capital Equipment Exemption Upfront Capital Equipment Exemption Effective for purchases made after June 30, 2015, businesses can now exempt the purchase of capital equipment from sales tax. Prior to this law taking effect, a business needed to first pay the sales or use tax and then it could file no more than two capital equipment refund claims per year with the Minnesota Department of Revenue. The Department has revised Form ST3, Certificate of Exemption, to specifically add a sales tax exemption category for the purchase of capital equipment. Sales Tax Multiple Points of Use Revenue Notice September 28, 2015 The 2013 Legislature enacted a law allowing purchasers of services, digital goods, or computer software delivered electronically which will concurrently be available for use in multiple jurisdictions to apportion Minnesota sales or use tax on these purchases. At the time of the purchase, the purchaser is to provide the seller with a multiple points of use exemption certificate. The Department has taken the position that this law just allows purchasers to apportion the tax that is due and that this is not an exemption from the tax. As a result, the Department is taking the position that it will not approve purchaser refund claims or amended use tax returns on this issue. Sales Tax Real Estate vs. Tangible Personal Property Dahmes Stainless, Inc. v. Commissioner of Revenue, Minn. Tax Court April 7, 2015 Dahmes Stainless, Inc., manufactures and installs large drying systems and charges Minnesota sales tax when these systems are sold to customers located in Minnesota. The DOR conducted an audit asserting that Dahmes was a contractor making improvements to real estate. As a result, the DOR assessed Dahmes $365,000 in use tax on its purchases. Dahmes appealed this assessment directly to Tax Court. The Tax Court held in favor of the taxpayer and said that these drying systems were items of tangible personal property because they were not of a permanent benefit to the building. Sales Tax Real Estate vs. Tangible Personal Property Cont. Dahmes Stainless, Inc. v. Commissioner of Revenue, Minn. Tax Court April 7, 2015 On October 1, 2015, the Tax Court awarded the taxpayer $38,600 in attorney fees and $2,500 in costs. At the time of the audit, Dahmes had fewer than 500 employees and less than $7 million in annual revenue. The Tax Court awarded these fees to Dahmes because the Departments "continued reliance on case law that has been specifically overruled by statute is not reasonable" Sales Tax Indirect Audit Conga Corp. v. Commissioner of Revenue, Minn. Supreme Court August 5, 2015 Conga Corporation operates a restaurant, nightclub, and bar in Minneapolis. In conducting a sales tax audit for the periods January 2007 through March 2010, the Department determined that Conga had no business records for 2007 and that the records for the other years were unreliable. As a result, the Department used an indirect audit method to compute Conga's alcohol sales and other revenues. The Supreme Court upheld the Department's ability to use an indirect audit method. The taxpayer has the burden to maintain adequate and complete business records. The Department has broad auditing authority. The indirect audit method is to be used when the Department must reconstruct the taxpayer's business records. Sales Tax Tax Base Connexus Energy v. Commissioner of Revenue, Minn. Supreme Court August 5, 2015 Taxpayer electric cooperatives billed their subscribers monthly charges for electricity usage, collecting sales tax in the process. The cooperatives' rates factored in a "target margin." If a cooperative's actual margin was positive at year's end, excess revenues were distributed to its subscribers as equity interests. The cooperatives sought to recover the sales taxes that had been paid on the excess revenues that were eventually converted into members' equity. The cooperatives filed amended returns, and the DOR initially granted refunds. Sales Tax Tax Base Cont. Connexus Energy v. Commissioner of Revenue, Minn. Supreme Court August 5, 2015 (cont.) The DOR later considered these refunds erroneous and assessed the cooperatives to recover. The cooperatives' administrative appeals were unsuccessful, and the Tax Court upheld the DOR's actions. The Supreme Court upheld the DOR's ultimate denial of the cooperatives' refund claims, ruling the entire monthly amounts billed to subscribers were subject to sales tax: Sales tax is imposed on "gross receipts from retail sales." Although equity contributions are not subject to sales tax, the monthly bills sent to subscribers represented retail transactions for the sale of electricity. The bills made no mention of equity interest sales. Sales Tax Tax Base Cont. Connexus Energy v. Commissioner of Revenue, Minn. Supreme Court August 5, 2015 (cont.) Sales prices quoted on monthly bills represented the total amount of consideration. The Supreme Court also ruled that actions to recover erroneous refunds are limited by the specific 2-year statute of limitations in Minn. Stat. 289A.37, subd. 2, not the general 3 -year limitation in Minn. Stat. 289A.38, subd. 1. Individual Income Tax Charitable Deduction Michael and Jean Antonello, Minn. Tax Court November 13, 2014 The DOR denied the taxpayer's charitable contribution deduction for their $500,000 contribution to a charity. The acknowledgement letter from the charity failed to state that no goods or services had been provided in consideration for the contribution. However, a subsequent letter sent by the charity before the taxpayers filed their return did contain this statement. The Tax Court relied on this letter to allow the deduction for the contribution. The DOR requested the Tax Court correct a computational error that was made when the tax order was issued and increase the tax assessment from $16,000 to $88,000. Individual Income Tax Charitable Deduction Cont. Michael and Jean Antonello, Minn. Tax Court November 13, 2014 (cont.) The Tax Court denied the DOR's request to increase the assessment because: The statute does not allow the DOR to appeal from a tax order which it issued; The statute does not allow the DOR to assert a counterclaim against the taxpayer; and The statute of limitations for the time period to issue an assessment for this year had expired. While the Tax Court did not increase the tax assessment, the Tax Court did use the corrected tax amount to determine if the taxpayer would owe a smaller tax amount. Tennessee and Kentucky Developments Mr. Michael Yopp Partner Waller Lansden Dortch & Davis LLP Nashville, Tennessee Franchise and Excise Tax REVENUE MODERNIZATION ACT Adopts a triple-weighted sales factor in Tennessees apportionment formula, effective for fiscal years beginning on or after July 1, Replaces cost-of-performance methodology for sourcing sales of other than tangible personal property for apportionment purposes with a market-sourcing approach, effective for fiscal years beginning on or after July 1, 2016. Franchise and Excise Tax Cont. The proposed market approach sources sales based upon the deemed delivery location, or use location, of the sale or service. -To the extent that a sale cannot be sourcedeither precisely or approximately the Act adopts a throw-out rule which excludes the sale from both the numerator and denominator of the sales factor for apportionment purposes. Proposed regulations have been informally circulated to requesting stakeholders and first comments were filed October 26, 2015. Finally, effective fiscal years beginning on or after July 1, 2016, deductions for intangible expenses paid to affiliates require that the Commissioner determine that the transaction has a substantial business purpose and does not have a principal purpose to avoid tax. Under current law, the deductions were permitted so long as tax avoidance was not the principal purpose of the transaction(s). Franchise and Excise Tax Cont. Effective July 1, 2015, sales and use tax are imposed upon purchases of video game digital products, including video games, access to which are provided remotely on a per use, per user, per license, subscription, or other basis. Also tax is imposed upon the sale of computer software access provided pursuant to application service provider (ASP) or software as service (SAAS) platforms to customers in Tennessee. Sales and Use Tax Sales and Use Tax Cont. Where the purchase price of such ASP or SAAS access relates to users both inside and outside of Tennessee, the seller may allocate the sales price based upon the percentage of in-state and out-of-state users. Services not subject to tax, such as payment processing services, Internet services, or the mere provision of online data storage will remain exempt. Effective for fiscal years beginning on or after January 1, 2016, the business tax base applies to parties: (1) selling tangible personal property shipped into Tennessee; (2) selling services delivered to a Tennessee location; (3) leasing tangible personal property located in Tennessee; and (4) natural gas marketers selling to in-state customers while holding property (including pipeline capacity) or conducting any other activities within the state via employees, agents, independent contractors, or similar parties. Business Tax Business Tax Cont. The Act also limits the exclusion from business taxation for out-of-state services to include only those delivered to out-of-state locations, as opposed to the current rule which excludes services substantially performed in another state. Tennessee has now reiterated taxing nexus over out-of- state businesses to the full extent permissible under the United States Constitution for all taxes. Substantial nexus in this state means any direct or indirect connection *** such that the taxpayer can be required under the Constitution *** to remit the tax ***. Such connection includes, but is not limited to *** systematic and continuous business activity in this state that has produced gross receipts attributable to customers in this state; or Nexus Nexus Cont. (D) The taxpayer has [Factor Presence Nexus]: (1)total receipts exceed $500,000 or 25% of total receipts everywhere; or (2)the average value of tangible personal property owned or rented in Tennessee exceeds the lesser of $50,000; or (3)25% of the average value of real and tangible personal property everywhere; or compensation paid in Tennessee exceeds $50,000 or 25% of total compensation paid. Nexus Cont. Also effective January 1, 2016, the Act imposes nexus for franchise and excise tax purposes on taxpayers licensing intangibles for use within Tennesseefollowing a trend already adopted in numerous other states. KDOR v. Mark F. Sommer and Sommer and Tax Analysts v. KDOR Facts: In two actions, Franklin Circuit Court ordered KDOR to release certain records requested by taxpayer under the Open Records Act case pleadings put of record and appealed and non-appealed Final Rulings. Issue: Did grounds exist to reconsider the ordered release of records to the taxpayer? Was taxpayer entitled to attorney fees as a result of KDORs failure to produce records? Holding: Motion to reconsider was denied. In one of the two cases, Court also granted Sommers request for attorney fees, awarding half of taxpayers attorney fees due to KDORs willful withholding of records for which privacy protection was lost through an appeal to the KBTA. Progress Metal Reclamation v. KDOR Issue: Whether certain items used in industrial processing are exempt industrial tools and supplies under KRS (11) Holding: Affirmed holding that hammer pin was not an industrial tool, but liquid oxygen was an industrial supply. Importantly, Court of Appeals applied Doctrine of Contemporaneous Construction to bind KDOR to its longstanding administrative training manuals/directives/position that liquid oxygen was an industrial supply. Alabama Developments The Honorable William L. Thompson Chief Tax Tribunal Judge Alabama Tax Tribunal Montgomery, Alabama Tribunals First Year of Operating Beginning October 2014 New Procedures Discovery Local Jurisdictions Recent Rulings Stone Bridge Farms LLC Lodging Tax Case COST Administrative Scorecard Independent Dispute Forums AK HI ME RI VT NH MA NY CT PA NJ DC DE WV NC SC GA FL IL OH IN MI WI KY TN AL MS AR LA TX OK MO KS IA MN ND SD NE NM AZ CO UT WY MT WA OR ID NV CA VA MD Points assessed for factors demonstrating a lack of independent tribunal 0 points 1 points 2 points 3 points COST Administrative Scorecard Independent Dispute Forums Cont. Elements of an effective and independent state tax appeals process considered: The appeals forum must be truly independent; Taxpayers must not be forced to pay or post a bond prior to an independent hearing and resolution of a dispute; The record for further appeals must be established before an independent body; and The arbiter at the hearing must be well-versed in the intricacies of state tax laws and concepts. No Tribunal 16 states do not have tax tribunals AR, CA, CO, FL, ME, NE, NV, ND, OK, RI, SD, TN, TX, UT, VT, VA Tax Tribunal - 35 states (including DC) have some form of tax tribunal/court (29 executive branch + 6 judicial branch = 35) 29 Executive Branch AK, AL, DE, DC, GA, ID, IL, IA, KS, KY, LA, MD, MA, MI, MN, MS, MO, MT, NH, NM NY, NC, OH, PA, SC, WA, WV, WI, WY 6 Judicial Branch AZ, CT, HI, IN, NJ, OR Summary from AICPA State and Local Tax Resource Panel Chart Illinois, Indiana, and Wisconsin Developments Mr. Brian J. Walsh Director Deloitte Tax LLP Chicago, Illinois New Republican Governor Democratic Super Majority (veto-proof control of legislature) Illinois Fiscal Health Gridlock No budget Backlog of unpaid bills Pension Reform Prior reform stuck down by Illinois Supreme Court. Lottery not paying winners over $600 Bond Rating - BAA1 Illinois Update Overall Key Considerations Corporate and Individual tax rates have gone down. Legislation to make the tax rate increases permanent has not passed Net operating losses deductions are no longer limited for years ending on or after December 31, 2014 New Director of Revenue Illinois audit experience Illinois Update Overall Key Considerations Cont. Tax Rates: Corporate Rate: For taxable years beginning on or after January 1, 2011, and ending prior to January 1, 2015, the rate is 7%, plus the 2.5% replacement tax for a total rate of 9.5%. For taxable years beginning on or after January 1, 2015, and ending prior to January 1, 2025, the rate is 5.25%, plus the 2.5% replacement tax for a total rate of 7.75%. For taxable years beginning on or after January 1, 2025, the rate is 4.8% plus the 2.5% replacement tax rate for a total rate of 7.3%. Illinois Update Overall Key Considerations Cont. Tax Rates: Individuals For taxable years beginning on or after January 1, 2011, and ending prior to January 1, 2015, the rate is 5% For taxable years beginning on or after January 1, 2015, and ending prior to January 1, 2025, the rate is 3.75% For taxable years beginning on or after January 1, 2025, the rate is 3.25% Illinois Update Overall Key Considerations Cont. In June 2015 a Circuit Court Case was Decided Adopting a Significant Economic Presence Test 1.The Taxpayer collected millions of dollars in fees and interest from Illinois residents 2.The Taxpayer systematically and continuously engaged Illinois consumers via the telephone,, and direct mail solicitation to apply for credit 3.The Taxpayer use Illinois courts to recover debts on delinquent accounts 4.The Taxpayer filed and enforced judgment liens in Illinois. Illinois Update Court Cases In June 2015 a Circuit Court Case was Decided Adopting a Significant Economic Presence Test The Circuit Court held the Taxpayer has significant economic presence in Illinois. Decision is being appealed. Illinois Update Court Cases Cont. Illinois Tax Tribunal Denies Taxpayers Motion for Summary Judgment, June 2015 Contested Issues - 80/20 Test and Imputing Factors Illinois law requires that companies with 80 percent of it property and payroll outside the US to be excluded from the combined unitary group. Taxpayer had a wholly owned Subsidiary(SUB) SUB operated a network of foreign branches that employed hundreds of employees outside the US. Illinois Update Court Cases Cont. Illinois Tax Tribunal Denies Taxpayers Motion for Summary Judgment, June 2015 SUB licensed from Taxpayer the right to sublicense hardware and software technologies in foreign countries.. Illinois auditor imputed enough property and payroll to SUB so that it failed the 80/20 test. Taxpayer filed a motion for summary judgment challenging the Departments legal authority to impute property and payroll. Motion was denied. Case continues. Illinois Update Court Cases Cont. Foreign Throwback Cases Currently three pending similar cases Two pending in Circuit court, one in the tax tribunal Illinois has a Throwback Rule Sales shipped from Illinois to a state where the taxpayer is not taxable are thrown back to Illinois Illinois requires a taxpayer to file a return and pay tax to be taxable. Illinois Update Court Cases Cont. Foreign Throwback Cases A person who is not required to pay net income tax by a foreign country or political subdivision as the result of a treaty provision exempting certain persons... is not subject to net income tax in that jurisdiction. The taxpayer sells tangible property into a foreign country. The taxpayer send engineers to supervise the assembly. Activities do not rise to a PE Illinois threw the sales back because taxpayer was not taxable under the regulation. Illinois Update Court Cases Cont. Chief ALJ and one ALJ appointed by Governor and now confirmed by the Senate Liability greater than $15,000 (specific taxes excluded) Independent of Illinois Department of Revenue Circuit Court rules of evidence and privilege apply Taxpayers representative must be an attorney Burden of proof on taxpayer Decisions can be appealed to circuit and appellate court In effect since 1/1/2014 Illinois Update Independent Tax Tribunal Ind. P.L. 250, 242, 138, and 213 Elimination of the sales factor throwback rule; effective 1/1/2016 Revision of the intercompany expense addback statute; effective 1/1/2016 Redefinition of business income; effective 1/1/2016 Updated conformity to the Internal Revenue Code; effective retroactively to 1/1/2015 Adoption of several changes to Indiana sales and use tax law; and Authorization of a new amnesty program for tax years ending before 1/1/2013 Indiana Legislative Update Wisconsin Act 55 Modifies the qualification and computation of the Manufacturing and Agriculture Tax Credit; For taxable years beginning after 12/31/2014 and before 1/1/2016 is reduced to 5.025%. For taxable years ending after 12/31/2015 the credit is 7.5% Modifies the calculations and definitions for the Research and Development Credit; for taxable years beginning after 12/31/2014. Creates a new Business Development Credit for taxable years beginning after 12/31/2015. Wisconsin Legislative Update Wisconsin Act 55 Conforms Wisconsins individual income tax Alternative Minimum Tax (AMT) exemption amounts and exemption phase- out provisions to the federal income tax treatment in effect for the applicable tax year, for taxable years beginning on or after 1/1/2017; Modifies sales and use tax definitions related to retailers doing business in Wisconsin; Delays implementation of the private label credit card bad debt provisions for sales and use tax purposes; The amendment takes effect 1/1/2017 Wisconsin Legislative Update Cont. F EATURING S PECIAL G UESTS : Mr. Doug Sigel Administrative Partner Ryan Law Firm, LLP Austin, Texas Ms. Maureen Pechacek, CPA Partner PricewaterhouseCoopers LLP Minneapolis, MN Mr. Fred J. Nicely, Esq. Tax Counsel Council On State Taxation Washington, DC Key Changes in Washington State Economic nexus enacted for apportionable activities beginning June 1, 2010 Applies to nonresident individuals and business entities with: More than $50,000 of property in Washington; More than $50,000 of payroll in Washington; More than $250,000 of receipts from Washington; or At least 25% of property, payroll, or total receipts in Washington WA Key Changes in Washington State Cont. Economic nexus extended to wholesale sales beginning Sept. 1, 2015 Washington enacted economic nexus on June 1, 2010, but it was limited to apportionable activities. The latest legislation, effective September 1, 2015, extends the reach of economic nexus to wholesale sales activities. This affects businesses reporting under the general wholesale B&O tax classification, including the wholesale sale of digital products. WA Key Changes in Washington State Cont. Sales tax click-through nexus for remote sellers Effective Sept. 1, 2015 creates a rebuttable presumption of nexus when (1) a remote seller enters into an agreement with WA resident under which the resident, for a consideration or commission, directly or indirectly refers potential customers to the seller and (2) gross receipts from such sales exceed $10,000 during the preceding calendar year. Repealed preferential B&O rate for royalties Preferential rate of 0.484% increase to 1.5% effective August 1, 2015 WA Nexus Expansion in WA September 1, 2015 Economic nexus thresholds A business entity is organized or commercially domiciled in Washington More than $267,000 of gross income in Washington More than $53,000 of payroll in Washington More than $53,000 of property in Washington At least 25 percent of total property, payroll, or income in Washington WA Nexus Expansion in WA September 1, 2015 Cont. Reaching the threshold The statute was changed from application of the thresholds to any tax year to the immediately preceding tax year. Both apportionable income attributable to this state and wholesale sales delivered to this state are included when evaluating the sales threshold. Trailing nexus still applies and the department now applies this same trailing nexus to retail sales and other taxes reported on the combined excise tax return. WA Nexus Expansion in WA September 1, 2015 Cont. Key Concerns Companies have been actively and purposely isolating nexus so as not to incur Washington tax liability. The new laws puts much of that planning in jeopardy and in most cases makes it entirely moot. WA Nexus Expansion in WA September 1, 2015 Cont. Key Impacts Wholesale sales to Washington customers and/or 3 rd party distributors despite common carrier shipments Affiliate sales from the wholesaler and/or manufacturer to the in-state retailers Isolation of return policies, catalog distribution policies, and other separations of related party business activities no longer have any impact to the B&O tax. Drop shipments arrangements now in jeopardy WA Nexus Expansion in WA September 1, 2015 Cont. Key Considerations: Understanding the Application - Economic nexus does not apply to: Retail sales Aerospace wholesaling Timber products Government contracting Washington has some impactful exemptions Example: Import/Export exemption WA Nexus Expansion in WA September 1, 2015 Cont. Key Considerations: Washington has specialized industry rates (sometimes beneficial) Be careful on required annual filings Consider credits and/or sales tax exemptions Transfer pricing issues Discounts, Allowances, and Related Issues WA B&O Nexus - Washington Washington rejects transactional nexus requirement On April 29, 2015, the Washington Court of Appeals rejected the transactional nexus requirement, also known as dissociation, for Washington B&O tax and also concluded that a drop-shipper with Washington nexus is subject to B&O tax on sales delivered directly to its in-state customers. In deciding these issues, the Court held that WAC (Rule 193), which supports transactional nexus, was not binding on the Court as the Departments interpretive rules cannot subtract from the force of the statute and do not constrain the courts. Avnet, Inc. v. State of Washington, Department of Revenue, No II, Washington Court of Appeals, Division II (April 29, 2015)] WA Texas Franchise Tax: Legislative Update House Bill 32 Effective January 1, 2016 Regular tax rate cut to 0.75% and the retailer rate to 0.375% a cut of 25% Alternative EZ rate (available to small businesses) cut to 0.331% a cut of 42% and extended to businesses with up to $20 million in total revenue an increase of $10 million. TX Texas Franchise Tax: Legislative Update Cont. House Bill 2896 Effective January 1, 2018 Broadcaster receipts apportioned based on the payors legal domicile Defining broadcaster to mean a taxable entity, not including a cable service provider or a direct broadcast satellite service, that is a: television station licensed by the FCC; television broadcast network; cable television network; or television distribution company. TX Texas Franchise Tax: Legislative Update Cont. House Bill 2891 Effective January 1, 2016 Eliminates: certain professional associations and partnerships reporting requirements and filing fees Change to eliminate roughly $2.4 million in annual fees TX Hallmark Marketing Co. v. Hegar SCOTX Granted Oral Argument Issue: Whether Hallmarks net loss from the sale of investment and capital assets can be included in the denominator of the apportionment fraction used to calculate Hallmarks taxable margin under the Texas franchise tax? Tax Code (b): If a taxable entity sells an investment or capital asset, the taxable entitys gross receipts from its entire business for taxable margin includes only the net gain from the sale. TX Hallmark Marketing Co. v. Hegar Cont. SCOTX Granted Oral Argument The Thirteenth Court of Appeals affirmed the ruling in the Comptrollers favor. Court of Appeals relied on Comptroller Rule 3.591(e)(2) If the combination of net gains and losses results in a net loss, the taxable entity should net the loss against other receipts, but not below zero. TX Hallmark Marketing Co. v. Hegar Cont. SCOTX Granted Oral Argument Hallmark contends that: (b) plainly dictates that the net loss from the sale of investment and capital assets is not included in the denominator of the apportionment fact or fraction, and The Court should follow the plain meaning of (b) which provides that only the net gain from the sale is included, and reject the court of appeals reliance on Rule 3.591(e)(2). (b)? TX Hallmark Marketing Co. v. Hegar Cont. SCOTX Granted Oral Argument Questions raised: Is Tax Code (b) actually ambiguous? Did the court of appeals err by deferring to Comptroller Rule 3.591(e)(2) on grounds of ambiguity? Does Comptroller Rule 3.591(e)(2) conflict with the plain meaning of Tax Code (b)? Are Hallmarks net losses from sales of investment and capital assets included in the denominator of the apportionment factor fraction under the plain language of Tax Code (b)? TX American Multi-Cinema, Inc. v. Hegar Mot. For Rehg Filed Issue: Whether film exhibition costs in a movie theater can be excluded as costs of goods sold. Trial court concluded AMC could subtract costs to exhibit films but costs were limited to those associated with square footage housing the speakers and screens. Both parties appealed. TX American Multi-Cinema, Inc. v. Hegar Cont. Mot. For Rehg Filed On appeal, Comptroller argued: AMCs customers purchased right to observe the movie in a theater, which is not a good Purchase of ticket is a license Leave theater with memories, not copy of film TX American Multi-Cinema, Inc. v. Hegar Cont. Mot. For Rehg Filed Court of Appeals disagreed with Comptroller and concluded evidence supported trial courts finding for AMC that film exhibition costs are COGS. agreed with AMC that costs associated with the entire auditorium were direct costs of producing films. disagreed with the Comptroller that auditorium was a consumption space and not a production space. concluded evidence established AMCs entire auditorium was used in the films production. TX American Multi-Cinema, Inc. v. Hegar Cont. Mot. For Rehg Filed Court of Appeals Texas Comptrollers Fiscal Notes June-July 2015: Franchise Tax Lawsuit Could Cost Texas $1.5 Billion a Year. TX CGGVeritas Services (U.S.) v. Combs Pending in Austin Court of Appeals CGGVeritas is a geo-sciences company that produces and collects seismic data. Issue: Whether the materials and labor that CGGVeritas furnishes can be subtracted as cost of goods sold. The Trial Court said it was. Held that the seismic data produced constituted tangible personal property that qualifies as a good licensed to customers in its ordinary course of business. CGGVeritas allowed to subtract these costs as costs of goods sold. TX Hegar v. AutoHaus LP, LLP Pending in Austin Court of Appeals AutoHaus is an automobile dealer that installs new and replacement automotive parts. Tax Code (c) - The cost of goods sold includes all direct costs of acquiring or producing the goods, including (3) cost of materials that are consumed in the ordinary course of performing production activities[.] Tax Code (a)(2) Production includes construction, installation, manufacture, development, mining, extraction, improvement, creation, raising, or growth. But Comptroller Rule 3.588(b)(7) Production - Construction, manufacture, installation occurring during the manufacturing or construction process, development, mining, extraction, improvement, creation, raising, or growth. TX Hegar v. AutoHaus LP, LLP Cont. Pending in Austin Court of Appeals District Court [T]he Texas Comptroller Rule 3.588(b)(7) as it applies to the term production is unconstitutional and invalid. Installation outside of traditional manufacturing and construction may now qualify for the cost of goods sold deduction. TX Graphic Packaging Co. v. Hegar Petition for Review due in SCOTX Issue: Is the Texas Franchise Tax an income tax as defined with the Multistate Tax Compact, allowing the three-factor apportionment formula to be used in calculating taxable margin? Graphic Packaging is a corporation headquartered in Marietta, GA that sells packaging for consumer products. TX Graphic Packaging Co. v. Hegar Cont. Petition for Review due in SCOTX Graphic apportioned its margin to Texas using the MTCs three- factor formula. Three-factor formula: apportioning [a]ll business income... to this state by multiplying the income by a fraction, the numerator of which is the property factor plus the payroll factor plus the sales factor, and the denominator of which is three. Trial court granted summary judgment in favor of Comptroller. Graphic appealed. TX Graphic Packaging Co. v. Hegar Cont. Petition for Review due in SCOTX Comptroller argued on appeal: MTCs taxpayer option and apportionment method apply only to apportionment of income for a states income tax. The Texas franchise tax is not an income tax and does not involve the apportionment of income. The Compacts income tax definition does not expand MTC Articles III and IV to include the franchise tax. TX Graphic Packaging Co. v. Hegar Cont. Petition for Review due in SCOTX Third Court of Appeals agreed with the Comptroller and affirmed Trial Courts ruling. Comparing the plain meaning of the term net income to the statutory language describing the tax base for franchise tax, however, makes clear that the franchise tax does not fall within chapter 141s definition of income tax. Subtracting a fixed amount from total revenue is not deducting expenses from gross income. Legislature did not intend chapter 141s three-factor formula to be an alternative for apportioning margin for franchise tax purposes. Even though Graphics franchise tax was not a gross receipts tax it was also not a chapter 141 income tax. TX Status of Ohio Tax Reform To date, Ohio has stuck with the majority of its tax reform changes made in 2005: Enactment of a gross receipts tax: Commercial Activity Tax (CAT); Elimination of a Franchise Tax (greater of net worth or income); Elimination of general business and telecom personal property taxes (still applies to select utilities); and 10% real property tax increase for business properties OH Status of Ohio Tax Reform Cont Governor Kasich proposed two-year budget proposed: Increasing the sales tax rate and expanding the sales tax base - did not pass Increasing the CAT rate by 23% (0.26% to 0.32%) - did not pass However, the Governor was able to reduce personal income tax and exclude certain business income from the States personal income tax OH Ohio CAT Past Litigation Ohio Grocers case is food for off-premise consumption subject to the CAT Answer: Yes. Beaver Excavating case if CAT applies to motor fuel used on public roads, then the revenue derived from such activity must still be earmarked to transportation and not the States general revenue fund Result: motor fuel no longer subject to the CAT, now subject to Petroleum Activity Tax (PAT) at the rack at 0.65% OH Ohio CAT Cont. Current Sales-Factor Nexus Litigation Prior case, L.L. Bean was settled; now Newegg, Crutchfield and Mason Companies are pending before the Ohio Supreme Court First case at highest court of a state addressing constitutionality of the MTCs Sales-Factor Nexus position (over $500,000 in sales); it does not require taxpayers to have a physical presence (actual or agency) in a state for the state to assert its taxing authority Ohio Commissioners brief asserts sales made using the internet creates nexus via sellers customers use of the out-of-state businesses websites and their customers use of apps downloaded on their smart phones/tablets. Ohio Supreme Court likely to decide these cases by summer or fall of 2016 OH Will the CAT Keep a Broad Base? Since its enactment the following exemptions to the CAT have been put in place: Qualified Distribution Center (replaced exemption for distribution centers within one mile of Rickenbacker Airport); It has grown from one qualified center in 2007 to nine for 2016 Licensed casino operator receipts; Agricultural commodity handler receipts; Qualified integrated supply chain receipts; and Qualified uranium receipts. OH Future Ohio Tax Reform/Changes? Municipal income tax needs additional reform H.B. 5 enacted last December continued concern with limited NOL of just 5-years and compliance with over 590 local income tax jurisdictions Likely will see new legislative proposals to increase severance tax on gas and oil extracted via fracking Continued pressure from Governor Kasich to decrease personal income tax rate CAT increase to off-set revenue loss Broad tax rate increase (e.g., 0.26% to 0.32%); and/or Increase CAT on certain sectors (e.g., services not subject to the States sales tax) Will Ohio eliminate its sales tax on employment services? OH Oregon Proposed Gross Receipts Tax Five ballot initiatives have been proposed that would effectively transform the Oregon corporate minimum tax imposed on entities organized as Subchapter C corporations under the IRC into a gross receipts tax. Under these proposals, a corporate taxpayer with Oregon sales in excess of $25 million would be subject to a minimum tax equal to $30,001 plus 2.5% of sales in excess of $25 million. OR Oregon Cont. Proposed Gross Receipts Tax The likely impact of the ballot proposal is that the minimum tax would become the default method of taxation for most corporations with high Oregon sales. For companies with high Oregon sales, with low profit margins, or losses, the Oregon tax liability will increase. In addition, there could be an impact to provision considering Oregon credits are not allowed to be applied to the minimum tax portion of tax liability. P.L. 86 272 considerations OR Proposed Gross Receipts Tax Example OR Nevada S.B. 483, Signed on June 10, 2015 Effective July 1, 2015, legislation imposes an annual commerce tax on each business entity engaged in business in Nevada. Generally, the tax base is gross revenue apportioned to Nevada with a $4,000,000 standard deduction. There are exclusions and deductions from gross revenue. However, there is no deduction for cost of goods sold or other expenses incurred. NV Nevada Cont. S.B. 483, Signed on June 10, 2015 Tax rates vary from 0.051% to 0.331% depending on the industry in which the business entity is primarily engaged. The tax is imposed on a separate entity basis. Tax years for all taxpayers are the twelve months ending June 30. The first report is due 45 days after the end of the fiscal year ending June 30, Taxpayers may request a 30-day extension. NV Nevada Recent Efforts to Repeal S.B. 483 Referendum petition filed calling for an up-or-down vote by the people of Nevada on whether S.B. 483 should remain effective October 1, 2015: Carson District Court blocked this petition, stating that it violated Nevadas single subject rule for referendums, and did not provide an accurate Description of Effect telling voters what would happen if the referendum passed. NV Nevada Recent Efforts to Repeal S.B. 483 October 8, 2015: Separate referendum petition filed seeking to repeal only the commerce tax imposed under S.B. 483, while leaving other tax changes intact. December 2, 2015: Challenges denied, but subject to an appeal to the Nevada Supreme Court. Lawsuit filed in Clark County District Court asserting that S.B. 483 violates the Nevada Constitution NV California Developments Mr. Andres Vallejo, Esq. Partner Morrison & Foerster LLP San Francisco, California CA Developments Harley Davidson v. Franchise Tax Board (FTB), No. D (Cal. App. 4th Dist. May 28, 2015) Question: Is it discriminatory to allow intrastate unitary businesses to chose between combined and separate reporting while requiring interstate unitary businesses to use combined reporting? Background Interstate Unitary Business CA Rev. & Tax. Code (RTC) requires combined reporting method CA Developments Cont. Harley Davidson v. Franchise Tax Board (FTB), No. D (Cal. App. 4th Dist. May 28, 2015) Background Intrastate Unitary Business Handlery v. FTB Held that separate reporting is the default RTC allows intrastate businesses to elect to use combined reporting CA Developments Cont. Harley Davidson v. Franchise Tax Board (FTB), No. D (Cal. App. 4th Dist. May 28, 2015) Taxpayer engaged in a multi-state unitary business Argues that allowing only intrastate unitary businesses to choose combined or separate reporting is discriminatory Not arguing that combined reporting alone is inherently discriminatory or otherwise unconstitutional Argues that the option (i.e., separate or combined reporting) provides non-tax and tax benefits to those opting to use separate reporting CA Developments Cont. Harley Davidson v. Franchise Tax Board (FTB), No. D (Cal. App. 4th Dist. May 28, 2015) Trial court had granted FTB demurrer on Commerce Clause issue but the Court of Appeal recently reversed Court of Appeal found the provision to be facially discriminatory and remanded to the trial court to determine whether the scheme withstands strict scrutiny CA Developments Cont. Gillette Co. v. Franchise Tax Board, 209 Cal. App. 4th 938 (Cal. Ct. App. 2012), review granted, No. S (argued Oct. 6, 2015) Question: Is the Multistate Tax Compact (MTC) binding? More specifically, can state legislatures modify the MTCs apportionment election without withdrawing from the Compact? Background Trial Court FTB demurrer sustained Notwithstanding Section 38006 CA Developments Cont. Gillette Co. v. Franchise Tax Board, 209 Cal. App. 4th 938 (Cal. Ct. App. 2012), review granted, No. S (argued Oct. 6, 2015) Appellate Court Reversed the trial court decision Cant withdraw piecemeal California Supreme Court Arguments heard Oct. 6; opinion due within 90 days CA Developments Cont. Gillette Co. v. Franchise Tax Board, 209 Cal. App. 4th 938 (Cal. Ct. App. 2012), review granted, No. S (argued Oct. 6, 2015) S.B (June 2012) Repeals compact prospectively Doctrine of Election Validity of S.B. 105 under Prop. 13 Prop. 39 (Effective 1/1/13) Single-Sales Factor Apportionment CA Developments Cont. Gillette Co. v. Franchise Tax Board, 209 Cal. App. 4th 938 (Cal. Ct. App. 2012), review granted, No. S (argued Oct. 6, 2015) Combined Effect Gillette, S.B (and validity), and Prop. 39 Multiple permutations--What a mess!! FTB Guidance Indicating LCUP Other MTC Provisions State Deviations From MTC CA Developments Cont. Lucent Technologies, Inc. v. State Board of Equalization, No. B257808, 2015 Cal. App. LEXIS 886 (Cal. App. 2d Dist. Oct. 8, 2015) Question: Is software that is stored on tangible media taxable when transferred pursuant to a Technology Transfer Agreement (TTA)? Background CA Statute: Taxpayers entering into a TTA must pay sales tax on tangible personal property (TPP) but not intangible property Software and licenses to use software constitute intangible property CA Developments Cont. Lucent Technologies, Inc. v. State Board of Equalization, No. B257808, 2015 Cal. App. LEXIS 886 (Cal. App. 2d Dist. Oct. 8, 2015) Holding Transmission of software using a tape or disc in conjunction with the grant of a license to copy or use that software does not yield a taxable transaction because the tape or disc is merely a convenient storage medium It would be absurd to tax software transferred on physical media and not tax the same software transferred over the Internet CA Developments Cont. California Assembly Bill (AB) 154: Federal conformity bill Selectively conforms CA RTC to specific provisions of the Internal Revenue Code (IRC) Last conformity bill enacted in 2010 Changes CAs general specified date of conformity from 1/1/09 to 1/1/15 for tax years beginning after 1/1/15 CA Developments Cont. California Assembly Bill (AB) 154: New provision provides additional penalty relief regarding the large corporate understatement penalty (LCUP) set forth in RTC No penalty imposed on a tax increase resulting from a proper election under IRC 338 No penalty imposed on an understatement resulting from a change in federal method of accounting No penalty imposed on an understatement resulting from the FTBs imposition of an alternative apportionment/allocation method under RTC 25137 CA Developments Cont. FTB Legal Ruling (June 19, 2015) RTC 25102: In the case of two or more persons owned or controlled directly or indirectly by the same interests, the Franchise Tax Board may permit or require the filing of a combined report and such other information as it deems necessary and is authorized to impose the tax due under this part as through the combined entire net income was that of one person, or to distribute, apportion, or allocate gross income or deductions between or among such persons, if it determines that such consolidation, distribution, apportionment, or allocation is necessary in order to reflect the proper income of such persons. CA Developments Cont. FTB Legal Ruling (June 19, 2015) FTB states in Footnote 2: It is wholly within the Franchise Tax Boards discretion as to whether Revenue and Taxation Code section should be applied. Implications: FTB is using RTC as authority to combine entities without unity of ownership But RTC generally requires that each entity be linked by stock ownership consisting of at least 50% of the corporations voting stock Is an exception to the bright line rule in 25105? Does provide an independent basis for combination? Michigan Developments Mr. Daniel L. Stanley, Esq. Partner Honigman Miller Schwartz and Cohn LLP Lansing, Michigan Michigan Multistate Tax Compact Litigation IBM won at Michigan Supreme Court in July In September 2014, the Michigan Legislature retroactively withdrew from the Compact effective January 1, Michigan Court of Claims and Court of Appeals upheld the retroactive withdrawal. All taxpayers, including IBM, have lost. Approximately 50 taxpayers have filed Applications for Leave to Michigan Supreme Court. Litigation is also ongoing for some taxpayers regarding the application of the Compact to the former SBT. Michigan Statute of Limitations Changes Under prior law, the 4 year statute of limitations was suspended during an audit and for a year thereafter. Effective February 6, 2014, this law was repealed and written waivers are now required. The Department of Treasury has announced that it considers audits that were pending as of February 6, 2014 to be grandfathered and the statute of limitations is suspended during the audit based on the prior law. Treasurys position is likely incorrect. Taxpayers under audits begun prior to February 6, 2014 should: (a) look closely at whether the statute of limitations has run on assessments; and, (b) file refund claims ASAP if they have one. Michigan Business Tax Credit Litigation The Department of Treasurys MBT Return Forms are wrong. The MBT Act provides that MBT investment tax and compensation credits are taken before any other credit under this Act. Also, certain credits under this Act are refundable. The Department of Treasury took the position that SBT Brownfield Rehabilitation Carryforward Credit and the Unused Carryforward Credit were SBT credits, not MBT Credits. We recently won the Ashley Capital case. Taxpayers with open MBT years should consider Amended Returns. Michigan Sales and Use Tax Developments Cloud Computing/SAAS Taxpayers have been successful arguing that cloud computing and SAAS is not taxable. Thompson Reuters, Auto-Owners, GXS. The Department of Treasury filed an Application for Leave with the Michigan Supreme Court in Thompson Reuters, which remains pending. The Department is not settling these cases yet. Legislation has been proposed by the Administration. Industrial Processing Exemption Michigan Supreme Court decided the Detroit Edison case in July Electric distribution system used simultaneously for both exempt and non-exempt purposes. Expect Treasury to take this position with other taxpayers. Maine / New Hampshire Developments Mr. Jonathan Block Partner Pierce Atwood LLP Portland, Maine Maine Tax Reform Governor proposed sweeping tax reform in January 2015 Income tax cut (from 7.95% to 5.75% for individuals; from 8.93% to 7.5% for corporations) Elimination of itemized deductions and many credits Elimination of estate tax Major sales tax expansion to cover numerous services, including lawyers and accountants Proposal was rejected Maine What did pass? Individual income tax rate reduction (7.95% to 7.15%) Phase out of itemized and standard deductions; re- bracketing Refundable EITC Refundable sales tax fairness credit Exemption of military pensions Expansion of sales tax on food items Estate tax exclusion amount increased Maine Assault on Tax Expenditures Legislature to annually review many tax expenditures to determine whether their purpose, intent and goals are being achieved Maine expanded clean elections referendum passed to be paid for by elimination of tax expenditures Money will be taken from business to pay for robocalls, yard signs, campaign ads, etc. New Hampshire Rate Cuts Modest tax rate cuts BPT from 8.5% to 8.2% BET from 0.75% to 0.72% Further reductions possible if revenue targets are met New Hampshire Collection Enhancements Tax Amnesty running from 12/1/15 thru 2/15/16. No penalties; interest abated After close of amnesty, DRA prohibited from waiving, abating or reducing any penalties with respect to taxes due before December 1, 2015 Voluntary Disclosure Program established MTC Audits authorized Whats Happening Friday December 18, 2015 F EATURING S PECIAL G UESTS : Mr. Richard Genetelli Managing Director Genetelli Consulting Group New York, New York Mr. Jason Zorfas Executive Director EY LLP Boston, Massachusetts Mr. Mitchell Newmark Partner Morrison & Foerster LLP New York, New York New Jersey Appellate Court Developments Lorillard Licensing v. Director, we argued in Appellate Division on Sept. 21, 2015 decided December 4, The Appellate Division affirmed the Tax Court and held that New Jersey cannot apply dual nexus standards to determine whether a corporation could be subject to tax in another state for sales fraction throw-out purposes, New Jersey must use its own nexus standard. NJ New Jersey Appellate Court Developments Cont. Residuary Trust A u/w/o F.E. Kassner v. Director (May 28, 2015) Under the square corners doctrine, the Director cannot rely on his 2011 Bulletin to support his assessment issued in 2009 for the 2006 tax year when the taxpayer relied on the Directors published position stated in the Directors 1999 New Jersey State Tax News. The square corners doctrine requires the government to deal fairly with its citizens, eschewing inequitable practices. NJ NJ Tax Court Developments Cont. Springs Licensing Grp., Inc. v. Director (Aug. 14, 2015) Director is not prohibited from asserting a company has nexus by its receipt of royalties from an affiliate when the affiliated payors tax years are closed (notwithstanding that the payor can no longer seek refunds for a reduction of its royalty add-back). NJ NJ Tax Court Developments MCI Communications Services, Inc. v. Director (July 20, 2015) New Jersey will take federal consolidated return affiliate- company attribute reductions (as if it is a combined return state) when taxpayers attributes are reduced because a bankrupt affiliate has more cancellation of indebtedness income than reducible attributes. Appealed to Appellate Division. NJ NJ Legislative Developments Anti-Inversion Bill Approved by Assembly (Dec. 3, 2015) Prohibits awarding of state contracts and development incentives if the applicant, or its corporate parent, became an inverted domestic corporation prior to its application. Defines inverted domestic company as a company that has been determined to be an inverted company by the Internal Revenue Service pursuant to IRC Section 7874(b). NJ PA Developments Nextel Communications of the Mid-Atlantic v. Commonwealth of PA (November 23, 2015) PA statute provided that net losses from prior tax years may be carried forward and, in addition to a limit of carryforward years (10 or 20), the amount usable each year is capped at the greater of 12.5% of taxable income or $3MM If taxpayers income is under $3MM, taxpayer can reduce its tax to zero. If taxpayers income is over $3MM, taxpayer cannot reduce its tax to zero. NJ PA Developments Nextel Communications of the Mid-Atlantic v. Commonwealth of PA (November 23, 2015) cont. Held: Disparate treatment based on size of income violates uniformity Not saved by small proportion of taxpayers (1.2%) or by budgetary limits Held: Remedy to allow refund claim taking the full NOL carryforward (uncapped) is the correct answer Dissent - argued to keep the % limit and strike the $3MM cap allowing everyone to use the cap NJ Debt/Equity Issues Recent Developments Massachusetts Mutual Life Insurance (Mass. App. Tax Bd.) At issue was whether intercompany advances made by a parent company, MassMutual Life Insurance Company (MMLIC), to its wholly owned subsidiary, MassMutual Holding Company (MMH), constituted bona fide debt. The Appellate Tax Board held in favor of the taxpayer the advances were a bona fide debt, and thus the interest payments made to MMLIC were deductible. MA MA DOR Conformity With Federal Determinations Recent Updates National Grid (Mass. App. Ct.) Was the taxpayers closing agreement with the Internal Revenue Service (IRS) binding for MA corporate excise purposes? Taxpayer entered into a closing agreement with IRS, pursuant to which a portion of interest deductions were allowed; the Massachusetts Department of Revenue (MA DOR) disallowed the deductions in their entirety. Taxpayer argued that the closing agreement with IRS required MA DOR to abate the tax. MA MA DOR Conformity With Federal Determinations Recent Updates Cont. Sarah P. Thayer (Mass. App. Tax Bd.) MA DOR disallowed a business expense deduction for costs associated with the care of three horses. During the same period, the taxpayer underwent an IRS audit, which found that the activities were a trade or business. The taxpayer claimed that MA was bound by the results of the federal audit. The Appellate Tax Board ruled that the federal determination was not binding. MA Sales and Use Tax Updates Regency Transportation (Mass. App. Tax Bd.) currently on appeal at Mass. Supreme Judicial Court Commissioner imposed a use tax on the purchase price of taxpayers fleet of vehicles Taxpayer argued that the imposition of tax on vehicles engaged in interstate commerce violated the Commerce Clause Com plete Auto lays out the four-prong test The Appellate Tax Board found that the tax did not violate the Commerce Clause MA Sales and Use Tax Updates Cont. Construction Contracts Generally, construction contractors are required to pay sales/use tax on their purchases of materials unless the contractor is acting as a retailer selling tangible personal property (TPP). Ski lifts Letter Ruling 15-1 Is a contract to furnish and install a ski lift a construction contract or a contract for sale/installation of TPP? Kitchen cabinets Letter Ruling 88-8 and DOR Directive 14-2 Custom cabinet makers are required to pay sales tax on the materials used in construction; persons selling prefabricated cabinets are not required to pay sales tax, but must collect and remit sales/use tax from their customers. MA Other Massachusetts Developments Sham Transaction Doctrine Seaport II (Mass. App. Tax Bd.) MA deeds excise tax assessment was upheld against a taxpayer who transferred encumbered property in return for relief from liability. The Appellate Tax Board disregarded the structure of the transfer because it was made for tax avoidance purposes. Statement of Financial Accounting Standards (FAS) 109 deduction delayed again Implementation of the corporate FAS 109 deduction applicable to certain publicly held companies is delayed for five years (until FY 2021). MA Other Massachusetts Developments Sham Transaction Doctrine Upcoming amnesty The Commissioner will establish a two-month tax amnesty program within FY 2016 for taxpayers who have failed to timely file or timely pay a tax liability. The program will focus primarily on non-filers. MA New York Corporate Tax Reform Developments NYC Corporate Tax Reform Legislation Enacted Technical and Clarifying Amendments to NYS Corporate Tax Reform Provisions Draft Regulations Investment Capital Identification Procedures Transitional Filing Provisions NY Significant Differences Between New York State and City Corporate Tax Reform Provisions NYC did not adopt the economic nexus standard enacted by NYS (deriving receipts from activity in New York with a de minimis receipts threshold of $1 million) NYS and NYC both continue to have economic nexus thresholds for credit card issuers NYC did not adopt the phase-out of the capital tax base NYS is gradually phasing out the capital tax base until it reaches zero percent for tax years beginning on or after January 1, 2021 (tax cap raised to $5 million) NYC retained the capital tax base, and raised the tax cap to $10 million NY Significant Differences Between New York State and City Corporate Tax Reform Provisions Cont. Unincorporated entities (i.e. partnerships) remain subject to the existing NYC UBT;S corporations remain subject to the existing NYC GCT/BCT Tax rate differentials; one-time apportionment formula election for small and mid-sized NYC taxpayers for tax years beginning after 2017 NY Other New York Developments SunGard (NYS TAT) Extensive unitary business analysis TD Holdings (NYS ALJ) Impacts potential benefit of NOL carryover Reporting Changes to NYC NY New York Audit Trends Unitary Business Economic Nexus Transfer Pricing Enforcement and Transparency NY Whats Happening Friday December 18, 2015 Holiday Greetings! To access this presentation, go to: