1 8am - state and local tax update

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State and Local Tax Update Walter Doggett – E* TRADE Financial Corporation Dan McGuire – KPMG Tysons Corner Dave Turzewski – KPMG New York Jennifer Petersen – KPMG San Francisco


1

Topics

■Introductions

■State of the states

■Trends in tax legislation

■Legislative developments ■ California ■ Ohio ■ Pennsylvania ■ Massachusetts ■ Minnesota ■ Oregon

■Other trends and developments ■ Income tax nexus ■ Tax Base ■ Allocation and Apportionment ■ Amnesty and special VDA programs

■Marketplace Fairness Act

State of the states


3

State revenues – Total taxes

Source: Federation of Tax Administrators.

-20

-15

-10

-5

0

5

10

15

20

Year over year percentage change on a monthly basis – September 2000 through August 2012

PercentageChange


4

State revenues – Total taxes

-30

-20

-10

0

10

20

30

Year over year percentage change on a monthly basis – January 2007 through August 2012

Indiv.Income

Sales

Corp.Income

Source: Federation of Tax Administrators.


5

Four-year impact

Change in Tax Revenues for 12 Months Ending June 2012 vs. June 2008

Alaska -10.5% Hawaii +0.4% D.C. -0.2%

More than -10% (7)

0% to -10% (19)

0% to +10% (17)

> + 10% (8)

23 States from -5% to +5%

Source: Census Bureau.


6

Last year

Change in Tax Revenues for 12 Months Ending June 2012 vs. June 2011

Alaska 37.1% Hawaii 8.6% D.C. 6.5%

More than 10% (9)

5% to 10% (17)

0% to 5% (18)

Less than 0% (7)


7

Budget difficulties: FY 2014 spending still below FY 2008

State General Fund Spending Recommended for FY 2014 Lower than in FY 2008

Source: National Association of State Budget Officers.

Spending Decreased

Spending Increased (plus AK, HI)


8

Change in state budgets Real percentage change – 1979-2013

Source: National Association of State Budget Officers.

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013


9

Net state tax changes – FY 1991-2012

5.4%

0.9% 0.4% 0.5%

1.6% 0.8% 0.6% 0.2% 0.6%

3.7%

0.4%

1.6%

0.5%

Source: National Conference of State Legislatures, August 2012.

$28

$24

$20

$16

$12

$8

$4

$0

-$4

-$8

-$12

-1.0%

-0.6% -

1.6% -

1.7% -2.0%

-0.3%

-0.4%

11%

10%

9%

8%

7%

6%

5%

4%

3%

2%

1%

0%

-1%

-2%

-3%

-4%

-5%

$15.4

$2.6

$1.4 $1.8

0.9%

-$3.3 -$4.0 -$2.6

-$7.1 -$7.3

-$9.9

-$1.5

$9.1 $8.8

$4.1 $3.4 $1.1

$4.1 $3.8

$28.6

$3.0

-$2.5

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012*

Billions of dollars Percent of previous year’s collections

0.2%

-$1.8


10

How states closed budget gaps (FY 2008 – FY 2012)

Total Gaps Closed = $650

Billion

Source: Center on Budget and Policy Priorities, April 2012.

Spending Cuts 45%

Emergency Federal Aid

24% Taxes

and Fees 16% Rainy Day

Funds and Reserves

9%

Other 7%


11

Summary of state budget woes

Many states still collecting less tax revenue and spending less than FY 2008 levels – Revenues have begun to grow again, but still far from full recovery

Spending in FY 2013 . . . Less on jobs

– Early in the recovery government payrolls grew, now 706,000 drop in jobs since post recession peak in April 2009

Less on education – Per pupil spending is down in 30 states; up 10% in 17 states

Less in general fund spending – 25+ states will have lower SGF spending in FY 2013 than in FY 2008


12

Budget difficulties: Are we done? Would that it were true!

Near Term One-time revenues and temporary tax increases must be backfilled with ongoing

revenues; Federal stimulus has run its course and is the same issue Housing continue to lag; unemployment remains inordinately high What to watch for:

– Pressure/inclination to ‘restore’ funding to reduced areas; – Pressure on property taxes – Condition of local governments

Long Term: Long-term projections show continuing decline in fiscal position – expenditures

substantially outstrip revenues over time “Fiscal gap” is equal to a permanent difference of 14 percent in revenues or

expenditures (up from 12 percent in April 2012) [GAO, April 2013] Driven by health care costs for low-income citizens as well as employees and

retirees

Trends in tax legislation


14

Amnesty & voluntary disclosure programs

Amnesties Current/Pending: – LA – 9/23/2013 through 11/22/2013, TBD dates in 2014 and 2015 – CT – 9/16/2013 through 11/15/2013 Recent: – KY – 10/1/2012 through 11/30/2012 – RI – 11/2/2012 through 11/15/2012 – TX – 6/12/2012 through 8/17/2012 – OH Consumers’ Use Tax – 10/1/2013 through 5/1/2013

– VDA Unclaimed property: – DE – through 7/1/15 ■Look-back is 1996 for VDA requests by 6/30/13 ■Look-back is 1993 for VDA requests after 6/30/13


15

Revenue actions: Corporate tax

Rate increases – Connecticut – Increase corporate surtax to 20 percent for 2012-2015 for certain larger corporations – Illinois – Increase corporate rate to 7 percent plus 2.5 percent PPTR through 2014 when rate drops to

5.25 percent (+2.5 PPTR) through 2024 Rate reductions

– Alaska – No tax on first $25,000 then graduated rate (effective 8/26/2013) – Arizona – Phased reductions begin in 2014; drop from 6.968% to 4.9% after 12/31/2016 – Idaho – Decrease corporate income tax rate to 7.4% – Indiana – Phase-in reduction from 8.5 percent to 6.5 percent by 1/1/2017 (6/30/2015 for nonbanks) – New Mexico – Phased reductions from 7.6 percent to 5.9% in 2018 – North Carolina – Current 6.9 percent rate will drop to 6.0 percent in 2014, 5% in 2015 – Texas – Temporary franchise tax reductions for 2014 (from 1% to .975%) and 2015 (to .95%) – West Virginia – Phased reductions from 7.75% for TY 2012 to 6.5% for TY 2014

Other – North Dakota – annual privilege tax on financial institutions repealed; banks subject to income tax

effective for tax years beginning after 1/1/2013 Numerous other states proposed, but did not enact rate changes


16

Revenue actions: Shoring up the corporate income tax

Statutory expanded nexus standards California (2011), Colorado (regulation), Connecticut (2010), Michigan, New York

State/New York City (Credit Card Banks), Ohio (CAT), Washington State (2010), Wisconsin

Combined Reporting Since 2003 Vermont, Texas, Michigan, New York, West Virginia, Massachusetts, Wisconsin,

D.C., Virginia New Mexico (combined reporting for big-box retailers) Ohio (financial institution combined reporting) Add-back Related party expense disallowance: Tennessee (2012), New York (2013 –

amendments to add-back statute), Pennsylvania (2013)


17

Shoring up the corporate income tax: Economic nexus

Tennessee Revenue Ruling 12-27 (1/8/13)

In re Washington Mutual, Inc (Wash. 12/19/12)

In re: Scioto Ins. Co. (Okla. 5/1/12)

Griffith v. ConAgra Brands (W. Va. 5/24/12)

Capital One/Geoffrey cert petitions filed (2009) Denied 6/22/09

Praxair (N.J. Super. Ct. App. Div. 12/15/08) Reversed 12/15/09

BATSA Introduced (2009) Failed to pass



Jack Daniels Properties, Inc. (Iowa ALJ 7/28/11)

KFC Corp. (Iowa 12/30/10)

Ohio Dep’t of Taxation finds factor-presence nexus standard constitutional in L.L.Bean (Ohio 8/10/10)

Factor presence nexus regulation effective (Colo. 4/30/10)

“Substantial economic presence” applied (W.V. ALJ 1/6/10)

Praxair (N.J. 12/15/09)

“Substantial economic presence” law adopted (Conn. 9/9/09)

Factor presence nexus statute adopted (Cal. 2/20/09)

“Doing business” statute expanded (Wis. 1/19/09)

Capital One and Geoffrey (Mass. 1/8/09)

MBNA (Ind. Tax Ct. 10/20/08)

Economic nexus adopted for credit card banks (N.Y. 4/23/08)

Geoffrey (La. Ct. App. 2/8/08)

Department announces economic nexus position (Me. 2/08)

Geoffrey (Mass. App. Tax Bd. 7/24/07)

Economic nexus legislation adopted (Mich. 7/12/07)

Significant economic presence test adopted (N.H. 7/5/07)

Capital One (Mass. App. Tax Bd. 6/22/07)

State-Favorable Developments Taxpayer-Favorable Developments


18

Shoring up the corporate income tax: Combined reporting

Combined Reporting (2003)

Combined Reporting Required (AK, HI)

Separate Return States

No Corporate Income Tax


19

Shoring up the corporate income tax: Combined reporting (continued)

Combined Reporting (2013) Combined Reporting (2013)

Combined Reporting Considered in 2012 Combined Reporting Required (AK, HI, DC)

Separate Return States

No Corporate Income Tax

Combined Reporting Under Limited Circumstances


20

Expense add-back summary by state

Narrower

Royalties and intangible related expenses

and all intercompany interest

North Carolina

Georgia Indiana

Mississippi Michigan New York1 Pennsylvania Rhode Island Tennessee2

Virginia

Alabama Arkansas Connecticut, DC Illinois1 Maryland Massachusetts New Jersey Ohio West Virginia

Broader

Kentucky3 South Carolina4

Wisconsin5

and other expenses

1 To recipient outside combined report. 2 Unless safe harbor met, required to apply to deduct intangible and related interest paid to affiliates. 3 Management fees; but only intangible interest disallowed. 4 Includes, deductions for certain expenses related to dividends received. 5 Expanded to include intangible expenses and management fees. ** Note that Minnesota has expense disallowance for foreign operating corps; Oklahoma and North Dakota have expense disallowance for

payments to captive REITs, and Texas has de facto expense disallowance.


21

Revenue actions: Apportionment & sourcing

Continued movement to single-sales factor – AZ: Phase-in from 2013-2016 – CA: SSF for 2013 – LA: Certain businesses in 2012; currently required for manufacturing,

merchandisers – MN: Phase-in from 2007-2014 – NJ: Phase-in from 2010-2014 – NYC: Phase-in from 2009-2018 – PA: Phase-in to 100% in 2013 – UT: Phase-in 2011 for taxpayers with > 50% of total sales from economic activities

classified in a NAICS codes, except certain codes (e.g., mining, finance, etc.) – VA: Phase-in begins July 2011 for retail companies; optional SFF for manufacturing – WA: When apportionment is required

Market sourcing of services and/or intangibles – 2014: AZ (certain taxpayers), NE, PA – 2013: CA – 2012 or earlier: AL, GA, IL, IA, MD, ME, MI, OH, OK, UT, WA, and WI


22

Sales factor: Weighting for 2013

Double-weighted allowed or required (DC)

Equal-weighted/SFF allowed or required for certain taxpayers

Equally weighted (AK, HI)

No income based tax

NOTE: Based upon general sourcing rules.

Double-weighted/SFF allowed or required for certain taxpayers

SSF phasing in (AZ, MN, NJ, NYC)

SSF generally required

NJ 90%

SSF phase in for retail; elective for manufacturers

LA SSF for manufacturing or merchandisers; 2013 for eligible businesses

AZ for all nonair carrier taxpayers; phasing in SSF

NYC 60% SF

80

96

CA Prop 39 generally requires SSF; Gillette option TBD MD SSF allowed for

manufacturing

Current litigation allows MTC election No SSF for

non-sales factor weighted taxpayers


23

Sales factor: Market-based sourcing for services (2013)

Benefit/Market (AZ, NE and PA 2014)

IPA/COP (AK, DC, HI)

No Tax

NOTE: Different sourcing rules may apply to intangibles

Service Performed in State (%)

IPA/Market (FL)

2014

2014

AZ – Eff. For 2014, an election is available to phase-in market sourcing for multistate service providers

WA – Benefit of service sourcing for B&O purposes

FL – IPA/COP rule is not supported by a statute, thus rule is invalid and Florida should be interpreted to be a market –based sourcing state

2014

2014

Legislative Developments – California


25

California Assembly Bill 93 and Senate Bill 90

Effective July 1, 2014, Assembly Bill 93 adopts a new partial sales and use tax exemption for certain property used in qualifying manufacturing, processing, biotech, and R&D activities

Bills also make significant changes to California’s credits and incentives programs – Repeals credits and deductions for enterprise zones, targeted tax areas,

manufacturing enhancement areas, and Local Agency Military Base Recovery Areas effective Jan.1, 2014 Despite the repeal, hiring credits earned can be used for the full-five year

period Assembly Bill 93 adopts a hiring credit for qualified taxpayers that (1) have a net

increase of jobs in California and (2) hire qualifying full-time employees on or after Jan. 1, 2014 – Employees must perform more than 50% of their services in a designated

census tract area or economic development area – Limits on types of businesses that qualify and qualified employees must meet

certain criteria – Signed Jul. 11, 2013


26

California Assembly Bill 92

■ Effective for tax years beginning on or after January 1, 2014, taxpayers that exchange California property for out-of-state property in a IRC Section 1031 exchange are subject to annual information reporting requirements ‒ It is the FTB’s position that the deferred gain or loss is taxable in California when

the replacement property is sold ■ The FTB will assess tax on the deferred income if reports are not filed ■ Signed June 27, 2013


27

California Proposition 30

Increases the current 9.3% highest marginal individual income tax rate by 1% for individual filers on taxable income above $250,000 ($340,000 for HOH) – 2% on taxable income above $300,000 ($408,000 for HOH), – 3% percent on taxable income above $500,000 ($680,000 for HOH) – Brackets for joint filers are double the amounts for single filers

Increase is retroactive to tax years beginning on or after January 1, 2012 and expires on December 31, 2019

For withholding on pass-through entities and real estate transactions, the maximum rate applicable to individuals is now 12.3 %

Proposition 30 also increased California’s state sales and use tax rate by ¼ percent effective from January 1, 2013 through December 31, 2016

Approved by voters Nov. 2, 2012


28

California Proposition 39

■ Makes single-sales factor apportionment and market-based sourcing mandatory for certain corporate taxpayers effective for tax years beginning on or after January 1, 2013 – Mandatory single sales factor does not apply to taxpayers engaged in “qualified

business activities” meaning that the taxpayer derives more than 50 percent of its gross receipts from agriculture, extraction, savings and loans, or banks and financial activities

– Carve-out for certain cable companies Approved by voters Nov. 2, 2012


29

San Francisco, California, Proposition E

■ Phases out the current payroll expense tax and phases in a gross receipts tax (GRT) beginning January 1, 2014 Phase-out/ Phase-in occurs over multiple years, depending on actual revenue

performance over that period, with the full phase-in/phase-out effective by 2019 Rates dependent on revenue collections Taxpayers that file a combined California corporate income /franchise tax return are

required to file a combined San Francisco return Apportionment formulas vary by industry

■ Proposition E also makes significant changes to the annual business registration fee structure Currently, businesses pay annual business registration fees from $25 to $500 based

on payroll tax liability for the preceding year Under Proposition E, fees now range from $75 to $35,000 and are based on payroll

expense (for administrative offices) or gross receipts ■ Approved by voters November 2, 2012 ■ Banks and financial corporations are exempt under state law from local GRT ■ However banks and bank subsidiaries that do not file as financial corporations under

California tax law may be subject to San Francisco GRT

Legislative Developments – Massachusetts


31

Massachusetts H. 3535

Effective for tax years beginning on or after January 1, 2014, sales, other than sales of tangible personal property, will be sourced to Massachusetts if the taxpayer’s market for the sale is in Massachusetts

– Specific rules apply in determining whether the market for certain types of sales will be deemed to be in Massachusetts

• The sale of a service will be attributed to Massachusetts if and to the extent the service is delivered to a location in Massachusetts

• Intangible receipts will generally be attributed to Massachusetts if and to the extent the service used in Massachusetts

– Throwout rules

• Any intangible receipts not specifically sourced under the statute will be thrown out of the numerator and denominator

• Sales of other than tangible personal property attributed to a state where the taxpayer is not taxable or if the location of the sale cannot be determined or reasonably approximated are also excluded from the sales factor entirely

■ Veto override Jul. 24, 2013


32

Massachusetts H. 3538

Delays implementation of the FAS 109 deduction until 2015 – The deduction was originally scheduled to be taken over a 7-year period

beginning with the combined group’s taxable year that commenced in 2012 Signed Jul. 12, 2013

Legislative Developments – Minnesota


34

Minnesota House File 677

■ Various corporate income tax changes effective for tax years beginning on or after December 31, 2012 – Eliminates the Foreign Operating Corporation (FOC) classification – Repeals the foreign royalty subtraction – Provides that foreign entities’ income and factors are included in the combined

report – Adopts the so-called Finnigan apportionment rule – Dividends received deduction does not apply to dividends received from a captive

REIT – Repeals Multistate Tax Compact Commissioner can still participate in MTC audits


35

Minnesota House File 677 (cont.)

■ Sales and use tax changes effective for purchases after June 30, 2013 – Imposes sales and use tax on certain digital products and certain storage and

repair services – Adopts click-through nexus presumption – Enacts an upfront exemption for purchases of capital equipment – Provides for a multiple-points-of-use exemption process for electronically

delivered products that are concurrently available for use in more than one jurisdiction

■ Signed May 23, 2013

Legislative Developments – Oregon


37

Oregon

Senate Bill 307 ■ Repeals Multistate Tax Compact effective tax years beginning on or after January

1, 2013 ■ Effectively readopts the MTC provisions except for Article III, relating to taxpayer

election to apportion under the laws of the state or in accordance with the compact, and Article IV, relating to apportionment provisions

■ Signed Jun. 13, 2013 House Bill 3069 Repeals Oregon’s related party expense disallowance statute (ORS 314.296)

effective for tax years beginning on or after January 1, 2013 Provides a retroactive exception for when the recipient of the intangible income is

a related foreign corporation and the transaction had a valid business purpose Signed Jun. 24, 2013


38

Oregon

House Bill 2460 Effective for tax years beginning on or after January 1, 2014, in computing

Oregon taxable income, the income or loss of any unitary group member incorporated in certain jurisdictions must be added to federal taxable income

By February 1, 2014, the Department must provide a report to the legislature on the use of tax shelters and make recommendations for addressing noncompliance related to tax shelters

Signed Aug. 1, 2013

House Bill 3477 Effective January 1, 2014, the tax exemption for certain out-of-state financial

institutions conducting mortgage activities in Oregon is repealed Signed Jul. 2, 2013

Legislative Developments – Ohio


40

Ohio House Bill 510

Imposes a new Financial Institutions Tax (FIT) based on equity capital at a rate of 8 mills

New regime effective for the tax year that commences January 1, 2014 Highlights of the new law:

– Unlike the former corporate franchise tax, FI taxpayers that file a consolidated FR Y-9 with the Federal Reserve or a consolidated federally required “call report” will file a consolidated Ohio FIT report

– For the 2014 through 2017 tax years, a deduction from a financial institution's total equity capital is allowed for investments in an Ohio-qualified Real Estate Investment Trust; A corresponding deduction applies for apportionment purposes

– A single- gross receipts factor is used to apportion a financial institution’s equity capital to Ohio


41

Ohio House Bill 510 (cont.)

Under the general apportionment rule, gross receipts will be sourced to Ohio based on the proportion that a customer’s benefit with respect to the services received in Ohio bears to the benefit received by the customer everywhere – House Bill 510 provides fourteen specific examples of types of receipts that are

required to be included in the Ohio numerator, including receipts from loans, credit cards, and leases

Many of the credits previously available against the franchise tax are applicable to the FIT, including community investment, job retention, research, historic rehabilitation, and new markets tax credits

Effective beginning with the 2014 tax year, the DIT tax is eliminated and DIT taxpayers, except those affiliated with a financial institution and required to be included in a consolidated FIT report, will be subject to the CAT – Note that the definition of taxable gross receipts under the CAT were not

amended Signed Dec. 27, 2012

Legislative Developments – Pennsylvania


43

Pennsylvania House Bill 465

Bank Shares Tax Reform ■ Effective for calendar years beginning January 1, 2014 ■ HB 465 revises

‒ Definition of a “financial institution” ‒ Tax base ‒ Rates ‒ Nexus standard ‒ Apportionment

■ Signed July 9, 2013


44

Pennsylvania bank shares tax nexus standard

Under the new law, a financial institution is taxable only if it generates gross receipts > $100,000 in a taxable year and the taxpayer: – Maintains an office or branch in PA,

– Has employees, representatives, or independent contractors conducting

activity on its behalf in PA,

– Solicits business in PA,

– Owns, leases, or uses tangible property in PA to conduct business

activity,

– Holds a security interest, mortgage or lien in real or personal property

located in PA,

– Has a basis to apportion its receipts to PA, or

– Has a physical presence in PA for more than one day during the tax year


45

Pennsylvania bank shares tax apportionment

The new law requires single-sales factor apportionment – Currently, the bank share tax requires evenly weighted three factor

apportionment based on sales, deposits, and payroll Sales factor adopts market-based sourcing for essentially all receipts, including

services – Currently, the bank shares tax uses a costs of performance approach for

most services or time-spent for personal services

Income Tax Nexus


47

Nexus – Sham transaction doctrine – Allied Democq Spirits and Wines USA

Allied Domecq Spirits & Wines USA, Inc. v. Comm’r of Revenue. (Mass. Appellate Tax Bd. May 22, 2013) ■ Activities undertaken to establish nexus for a foreign parent were disregarded under

the sham transaction doctrine – Canadian-based parent of a U.S. subsidiary group transferred employees of

certain Massachusetts subsidiaries to its payroll, and leased office space at an affiliate’s Massachusetts location to house the transferred employees

– After the transfers, the Parent was included in taxpayer’s Massachusetts combined group and the Parent’s losses were used to offset the group’s income

■ In reaching its decision, the Board heavily relied on internal communications indicating that the reorganization was intended to reduce Massachusetts tax liability • Also, Board found it significant that there was no change in overall management

or for the purportedly transferred employees

Agency Nexus


49

Agency nexus – Harley Davidson

Harley Davidson, Inc. v. Franchise Tax Bd. (Ca. Super. Ct. May 1, 2013) ■ A California superior court held that two bankruptcy remote special purpose entities (SPEs) created for the purpose of bundling and selling securitized loans had substantial nexus with California ■ Although the SPEs had no physical presence in California, they had nexus with

the state because of their deeply integrated relationship with their related financing subsidiaries, as demonstrated by the interdependence and circular flow of funds among the entities ‒ The SPEs were also doing business in California through their agents (the

financing subsidiaries and dealers) ■ Furthermore, the SPEs were financial organizations as they were in competition

with national banks

Economic Nexus


51

Economic nexus -- In re Washington Mutual, Inc

In re Washington Mutual, Inc (Bankr. Del. Dec. 19, 2012 ) ■ A bankruptcy judge was asked to determine whether the Parent company of a

group of banks was jointly and severally liable for tax on income earned by consolidated group members – Parent had no property, payroll or income directly from in-state sources – Only income related to Oregon was the receipt of dividends from subsidiaries

operating in Oregon ■ Judge concluded that both the Due Process and Commerce Clauses precluded the

Department from holding the parent jointly and severally liable for the tax owed by its subsidiaries – Notably, the Parent earned no income from allowing the subsidiaries to use its

marks and the income the Department was seeking to tax was not the Parent’s income, but was income earned by the subsidiaries

– Holding the Parent liable for the corporate excise tax of its subsidiaries merely because it allowed the free use of its trademarks and received a dividend would “deeply burden interstate commerce”


52

Economic nexus -- W.L. Gore & Assocs

W.L. Gore & Assocs., Inc. v. Comptroller (Md. Ct. Spec. App. Jan. 24, 2013) Out-of-state holding companies with no physical presence in Maryland were

subject to corporate income tax – Companies had “sufficient nexus” with Maryland because they were unitary

with parent company who conducted business in state – Subsidiaries depended on parent company for their existence and enjoyed

functional integration and control – In a footnote, the court tried to address the taxpayer’s argument that it was

blurring the principles of constitutional nexus and a unitary business, noting that “where, as here, a parent company undoubtedly has a requisite nexus, the only question is whether the subsidiary partakes in the parent’s unitary business; if so, it inherits the parent’s nexus, and the tests are effectively merged

The court also held that applying the parent’s Maryland apportionment percentage to the subsidiaries’ income was proper


53

Economic nexus -- Matter of Scioto Ins. Co.

Matter of Scioto Ins. Co. v. Oklahoma Tax Commission (Okla. May 1, 2012) ■ Issue before the court was whether the Commission could tax an out-of-state

insurance company that licensed intangibles to an Oklahoma taxpayer that subsequently sublicensed the marks to Oklahoma restaurants – Insurance company did not receive royalty income directly from Oklahoma

restaurants – Sub-licensor deducted amounts paid to the insurance company on its

Oklahoma returns ■ Court held that Oklahoma could not tax the income derived from a contract

entered into outside of Oklahoma and no part of which was performed in the state – Furthermore, the insurance company was entitled to royalty income regardless

of whether the Oklahoma restaurants actually paid for the use of the marks


54

Economic nexus – Tennessee

Tennessee Revenue Ruling 12-27 (Jan. 8, 2013) ■ Department addressed whether a company licensing patents to an affiliate that

were ultimately incorporated into products sold in Tennessee was subject to Tennessee franchise and excise taxes – For Tennessee franchise and excise tax purposes, “doing business” is defined

as “any activity purposefully engaged in, within Tennessee, by a person with the object of gain, benefit, or advantage”

– The company’s sole contact with Tennessee was the eventual sale and delivery of products manufactured outside the state

■ Under these facts, the Department determined that the company’s contact with Tennessee was “too remote and indirect” to be characterized as an activity purposefully engaged in within Tennessee for profit


55

Economic nexus -- ConAgra Brands

Griffith v. ConAgra Brands (W. Va. May 24, 2012) ■ Issue was whether a taxpayer that licensed intangibles was “doing business” in

the state – Taxpayer licensed grocery-related brand names to related and unrelated

parties – All of the manufacturing occurred outside of West Virginia – Taxpayer had no control over how marks were used or where products were

distributed, but products bearing its marks and brand names were eventually sold in West Virginia stores

■ Court held that the taxpayer did not have Due Process or Commerce Clause nexus with West Virginia – Did not engage in any solicitation activities in-state and did not sell any

products directly to West Virginia retailers or wholesalers – Simply placing products in the stream of commerce was not enough

Tax Base


57

Tennessee non-conformity to excess inclusion income

■ KPMG received correspondence from Tennessee favorably adjusting a client’s Tennessee returns with explanation that the state does not require excess inclusion income to be included in the Tennessee excise tax base

‒ Tenn. Code Ann. 67-4-2006(a)(1) was cited as support that the Tennessee excise tax is federal taxable income or loss before the net operating loss deduction and special deductions

‒ The state explained that it does not require tax to be paid on excess inclusion income nor does the state follow the federal treatment in computing loss carryovers for years in which there was excess inclusion income

■ Similar interpretations of law may be applied to other states that start with line 28, federal taxable income (before net operating loss deduction and special deductions)


58

Michigan franchise tax – Equity of subsidiaries

■ Much confusion on how to report and eliminate equity of subsidiaries ■ Department of Treasury recently issued guidance (Notice to Taxpayers Regarding

Financial Institution Unitary Filing and Reporting of Eliminations for the MBT and CIT, 09/20/2013) ‒ Each member of a unitary group calculates net capital tax base separately ‒ May eliminate investment in positive equity capital of other members of the

same group ‒ Taxpayers with negative equity before eliminations should report equity as zero

before eliminations ‒ If eliminations cause equity to be negative, a negative number is reported on

the equity line ‒ Group must have positive or zero equity capital after eliminations ‒ Taxpayers that did not properly report subsidiary equity required to file

amended returns even if no additional tax due


59

Example

GAAP Books HC Bank Sub1 Eliminations

Consol. Equity

Inv. in sub $ 200 $ 995 $ 0 $ (1195) $ 0

Other assets 100 1000 1000 2100

Liabilities (350) (1795) (5) (2150)

GAAP equity capital

(50) 200 995 (1195) (50)

MI equity capital $ (200) $ (795) $ 995 $ 0

Allocation and Apportionment


61

Allocation and apportionment – Property factor

First Marblehead Corp. v. Comm’r of Revenue (Mass. App. Tax Bd. Apr. 17, 2013) ■ A taxpayer that (1) owned interests in sixteen trusts that purchased and

securitized student loan portfolios and (2) received interest income from the trusts, was considered a financial organization because it was engaged in lending activities through the trusts and was in substantial competition with banks ‒ Taxpayer had no employees or offices in Massachusetts, but had a

Massachusetts address where its books and records were maintained ■ Because the taxpayer had no regular place of business within or outside

Massachusetts, all of the loans were included in the Massachusetts property factor ‒ Massachusetts was the taxpayer’s conceded commercial domicile


62

New Jersey proposed market/customer sourcing regulations

■ Division of Taxation recently issued proposed regulations that would change the method of determining “where the service is performed” for receipts factor purposes from a cost of performance sourcing methodology to market-based sourcing for tax years beginning on or after January 1, 2014

■ Where actual costs of performance occur or time is spent in performing a service are no longer applicable when determining receipts sourcing in light of the move to single sales factor (which will be fully phased in for the 2014 tax year)

■ Interestingly, when New Jersey adopted single sales factor, the legislature only changed the allocation formula weighting, and did not alter the statutory numerator sourcing rule where New Jersey receipts include revenue from “… services performed within the State, …”

Upcoming Amnesty and Special Voluntary Disclosure Programs


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Delaware unclaimed property voluntary disclosure program

Administered by Secretary of State Holders that request participation prior to June 30, 2013 and remit full payment

prior to June 30, 2014 are not required to report property issued prior to 1996 Holders that request participation between July 1, 2013 and June 30, 2014 and

remit full payment prior to June 30, 2015 are not required to report property issued before 1993 – Property holders that have evidenced their intent to participate in the current

VDA program or a voluntary self-disclosure program prior to June 30, 2012, will be able to take advantage of the shortened look-back periods in the new legislation if they make their payments by June 30, 2014 or June 30, 2015 deadlines

Property holders that have received a notice of examination from the State Escheator or that have been referred to the State Escheator by the Secretary of State are not eligible to participate

Law prohibits State Escheator from commencing an audit of holders that have indicated intent to participate (in writing) on or before June 30, 2014


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Connecticut House Bill 6704

Establishes a tax amnesty program to run from September 16, 2013 through November 15, 2013 applicable for all taxes, except motor carrier fuels taxes, for any tax period ending on or before November 30, 2012 – Eligible taxpayers can receive a penalty and partial interest abatement – Post-amnesty penalty of 25 percent applies to nonfilers that fail to take

advantage of the amnesty opportunity


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Louisiana House Bill 456

Establishes a three part/ three year tax amnesty program; first period will be held from on September 23, 2013, and will run through November 22, 2013 – Taxpayers that participate in the first part will receive a 50 percent interest

abatement and full penalty abatement – Participants in the 2014 and 2015 programs will receive only a partial penalty

abatement and no interest waiver – Applies to all taxes administered by the state, except motor fuel taxes and

certain penalties for failing to submit certain information reports – Post-amnesty penalties and collection fees authorized


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Post-amnesty penalty – Marriott Int’l

Marriott Int’l, Inc. v. Hamer (Ill. App. Ct. Aug. 22, 2012) ■ Issue was whether the taxpayer was subject to the post-amnesty double interest penalty

– Illinois’s 2003 tax amnesty allowed taxpayers that paid in full “all taxes due” to receive an abatement of interest and penalties

• A double interest penalty applied to amounts due but not satisfied during the amnesty

– Taxpayer filed returns for the 2000 through 2002 tax years, but due to an IRS audit was later required to amend its Illinois returns for those years and pay additional tax

■ Court stressed the definition of the phrase “all taxes due,” which was not defined by the statute

– Based on a plain reading of the Illinois tax statutes and the IRC, the court determined that this phrase meant all the taxes due on the date fixed for filing the tax return regardless of whether the taxpayer was aware of the tax during the amnesty period


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Post-amnesty penalty – Metropolitan Live Ins.

Metropolitan Life Ins. Co. v. Hamer (Ill. S.Ct. Jun. 20, 2013) ■ Although the facts were almost identical to those in Marriott, the appeals court held the phrase

“all taxes due” included only taxes that were known to be due at the time the amnesty program was held

– Taxpayer timely filed returns for the 1998 and 1999 tax years, but owed additional Illinois tax after a lengthy and complex IRS audit

■ Illinois Supreme Court, in reversing the appeals court, determined that the phrase “all taxes due,” meant all taxes due as of the date the original return was required to be filed, rather than those known to the taxpayer

■ Further, the court held that the imposition of the penalty did not violate the taxpayer’s substantive due process

– In the court’s view, the Amnesty Act bore a reasonable relationship to the state’s legitimate interest in raising revenue

– Legislature had provided taxpayers an opportunity to avoid the double-interest penalty by making a good faith estimate of their tax liability.


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Post-amnesty penalty – UPS

UPS v. Div. of Taxation (N.J. App. Mar. 7, 2013) ■ Appeals court held that a tax court judge properly abated late payment and post amnesty

penalties – Late payment penalties should have been waived for reasonable cause because the

substantive tax issue was one of first impression in New Jersey and taxpayers had a reasonable basis for their position • Court found it significant that taxpayers would have received a reasonable cause

waiver if they had paid assessments, rather than pursuing an appeal – Court agreed that the post-amnesty penalties should not have been waived or abated by

the tax court; rather, these penalties did not apply to liabilities that were not known to the taxpayer at the time the amnesty program was held • Court noted the liability was only determined after a prolonged audit and could not

have been ascertained by a reasonable inquiry

Marketplace Fairness Act


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Marketplace fairness Act of 2013

Marketplace Fairness Act of 2013 (S. 743) ■ After being routed through an expedited voting process, S.743 passed the

Senate May 6, 2013 in a 69-27 vote ■ If enacted, S. 743 would grant certain states the authority to require remote

sellers to collect and remit sales and use taxes on sales into the state ■ Bill currently in House, where it arguably faces greater opposition


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Why should banks care?

■ Only a handful of states currently tax traditional banking services, e.g., ‒ Iowa taxes fees relating to a checking account ‒ New Mexico taxes bank services except those related to a loan

■ BUT several states considered legislation last year that would expand their sales tax base to cover some business-to-business services and certain financial services

– Examples: North Carolina, Louisiana, Minnesota, Ohio, Kentucky, Maine, and North Dakota

– Arizona attempted to tax sales of stocks and bonds, monetized bullion, etc.

■ If S. 743 is enacted, any bank performing these services may need to register with a state and begin collecting sales or use taxes on services provided to customers in states that tax these services ‒ Even if the bank does not have a branch or other physical location in that

state


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Serious compliance challenges

Major “game-changer” in state and local sales taxation of interstate commerce Issues for sellers ■ Registration in expanded number of states

■ Expanding collection to larger number of states

■ Acquiring, retaining, managing and retrieving exemption certificates

■ Taxability determinations in multiple states

■ Appropriate rate determination

■ Remittances and filing

■ Integration of automated systems

■ Managing additional audit demands

■ Dealing with increased “vendor-billed” tax

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Date post:	06-May-2015
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