Presenting a live 110‐minute teleconference with interactive Q&A LLCs and LLPs: Navigating Variable State Tax Treatment Variable State Tax Treatment Responding to Latest Changes in LLC Taxation, Non‐Resident Withholding, Entity Level Tax, Etc. 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific WEDNESDAY, JUNE 27, 2012 Today’s faculty features: 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific Bruce Ely, Partner , Bradley Arant Boult Cummings, Birmingham, Ala. John Fletcher, State Tax Counsel, General Electric Co., Albany, N.Y. Patrick Smith, State and Local Tax Director, PricewaterhouseCoopers, Chicago For this program, attendees must listen to the audio over the telephone. Please refer to the instructions emailed to the registrant for the dial-in information. Attendees can still view the presentation slides online. If you have any questions, please contact Customer Service at1-800-926-7926 ext. 10.
Transcript
Presenting a live 110‐minute teleconference with interactive Q&A
LLCs and LLPs: Navigating Variable State Tax TreatmentVariable State Tax TreatmentResponding to Latest Changes in LLC Taxation, Non‐Resident Withholding, Entity Level Tax, Etc.
Bruce Ely, Partner, Bradley Arant Boult Cummings, Birmingham, Ala.y, , y g , g ,
John Fletcher, State Tax Counsel, General Electric Co., Albany, N.Y.
Patrick Smith, State and Local Tax Director, PricewaterhouseCoopers, Chicago
For this program, attendees must listen to the audio over the telephone.
Please refer to the instructions emailed to the registrant for the dial-in information.Attendees can still view the presentation slides online. If you have any questions, pleasecontact Customer Service at1-800-926-7926 ext. 10.
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Continuing Education Credits FOR LIVE EVENT ONLY
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LLC d LLP N i ti V i bl LLCs and LLPs: Navigating Variable State Tax Treatment Seminar
• U.S. domestic unincorporated entity can elect its tax status, for federal income tax purposes.
– Defaults for U S entities (automatic):Defaults for U.S. entities (automatic):• Single member Disregarded entity (DRE)• Multiple members Partnership
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State Conformity (Or Not) To Federal Treatment Of Pass-Through Entities (Cont.)Treatment Of Pass Through Entities (Cont.)
• States are sovereign; they can set their own rules.
• Thankfully, state legislatures quickly acted to conform.– 25 states conformed in 199725 states conformed in 1997.– Today, the vast majority of states conform (see charts included
with Reference Materials for this program).
• But … there are exceptions.
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State Conformity (Or Not) To Federal Treatment Of Pass-Through Entities (Cont.)Treatment Of Pass Through Entities (Cont.)
• While conformity seems relatively straightforward …– It still leaves questions unanswered today.
• How the states conformed :How the states conformed : – DOR issued bulletins on conformity, or– Legislatures enacted specific conformity statutes.
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State Conformity (Or Not) To Federal Treatment Of Pass-Through Entities (Cont.)Treatment Of Pass Through Entities (Cont.)
• Some states …– Only addressed LLCs,
• And forgot about other PTEs (i.e., partnerships and/or business trusts).)
– Most say CTB only applies to income tax.• So, DRE for income tax, but NOT for net worth or sales/use,
etc taxesetc. taxes• Minority say CTB applies to many (perhaps ALL?) taxes.
– Missouri -- Alabama -- Wisconsin
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State Conformity (Or Not) To Federal Treatment Of Pass-Through Entities (Cont.)Treatment Of Pass Through Entities (Cont.)
• A few examples of non-conformity:– Colorado
• Corporate income tax – disregard single-member LLC (SMLLC) and impose corporate income tax on non-resident ( ) p pmember
– District of Columbia• Follows CTB for corporate income tax but still imposesFollows CTB for corporate income tax but still imposes
“unincorporated business tax” (UBT) on partnerships and LLCs not treated as corporations
• But rates are the sameBut, rates are the same … – Corp. rate = 9.975%– UBT rate = 9.975%
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State Conformity (Or Not) To Federal Treatment Of Pass-Through Entities (Cont.)Treatment Of Pass Through Entities (Cont.)
• Interesting examples of non-conformity– Louisiana
• CTB does not govern classification of LLCs, for Louisiana franchise (net worth) tax purposes.( ) p p
– Michigan• A long and tortured history
First SBT then MBT now CIT– First SBT, then MBT, now CIT– Kmart case– Three separate tax bulletins– NOW – MBT repealed by new CIT
» (But, be careful if you elected to remain in the MBT)
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State Conformity (Or Not) To Federal Treatment Of Pass-Through Entities (Cont.)Treatment Of Pass Through Entities (Cont.)
• Additional examples of non-conformity– Pennsylvania
• Income tax - Follows CTB• Capital stock/foreign franchise taxCapital stock/foreign franchise tax
– LPs exempt– LLCs taxable
C t t ibl lt• Can create some terrible results
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State Conformity (Or Not) To Federal Treatment Of Pass-Through Entities (Cont.)Treatment Of Pass Through Entities (Cont.)
• More examples of non-conformity– Tennessee
• Follows CTB, BUT …• Only SMLLCs that are federal DREs AND have a corporationOnly SMLLCs that are federal DREs AND have a corporation
or a business trust as their sole member are disregarded, for Tennessee excise tax purposes.
John Fletcher, General Electric Co.Bruce Ely, Bradley Arant Boult Cummings
NEXUS IMPLICATIONS
Nexus: Recent Statutory/Regulatory Guidance
Most of the recent statutory and regulatory guidance provides that ownership in an in-state pass-through entity establishes taxable nexus for nonresident partners/members.
• Colorado : 1 CCR 201-2:39-22-301.1(2)(v) (eff. April 30, 2010)
• Kentucky: Rev. Stat. Ann. Sec. 141.010(25) (2006)
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N J di i l D lNexus: Judicial DevelopmentsSimilarly, most of the recent court and administrative rulings have concluded that non-resident owners of interests in in state pass through entities had taxable nexus in their states resident owners of interests in in-state pass-through entities had taxable nexus in their states. Examples:
• Pennsylvania – Marshall v. Commonwealth (2012)
• Non-resident individual limited partner in Connecticut LP owning a building in Pittsburgh was taxable on COD income; court only addressed Due Process argument, Commerce Clause position was deemed waived.
• Kentucky – Revenue Cabinet v. Asworth Corp. (2010)
• Court of Appeals held that a corporate limited partner had nexus in KY; Kentucky Court of Appeals held that a corporate limited partner had nexus in KY; Kentucky Supreme Court denied review but “unpublished” the opinion.
• Iowa – Policy Letter 10240041 (2010)
• Idaho LLC had nexus in Iowa even without physical presence; any non-resident $members receiving more than $1,000 of income from LLC had filing obligations.
• New York – Matter of Shell Gas Gathering Corp. #2 (2010)
• NY Tax Tribunal ruled corporate members of LLC that held general partner interests in in-state partnership were subject to NY income tax; frighteningly broad rationale.in in state partnership were subject to NY income tax; frighteningly broad rationale.
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Nexus: Judicial Developments (Cont.)
Bucking the trend:
New Jersey - BIS LP, Inc. v. Dir., Div. of Taxation (2011)
• Classic LP tax structure; 2002 legislation provided ownership of any i t t i i t t LP tit t d “d i b i ”interest in an in-state LP constituted “doing business”.
• Court rejected statute; non-resident 99% corporate limited partner was not unitary with partnership, did not have New Jersey nexus.
Louisiana - UTELCOM, Inc. and UCOM, Inc. v. Bridges (2011)
• Court of Appeals held that non-resident corporate limited partners were not subject to corporate franchise tax.
S l d d h l • Strictly a statutory construction case; court did not reach constitutional issues or address income tax issues.
• Remember Autozone?
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Nexus: Judicial Developments (Cont.)
State responses: Some state courts have issued taxpayer-favorable decisions, only to result in their legislatures “fixing” the issue statutorily.
Alabama - Lanzi v. State Dept. of Rev. (2007)
• Alabama Supreme Court held that ownership in limited partnership did not provide sufficient minimum contacts to impose income tax on a non-resident partner.
• Legislature responded in 2009 by enacting a composite return regime.
Virginia – Dutton v Virginia Dept of Taxation (2007)Virginia Dutton v. Virginia Dept. of Taxation (2007)
• Circuit Court ruled non-resident LLC member was not subject to tax if only contact with state was ownership of LLC interest.
2007 L i l t t d id t ithh ldi i t• 2007 Legislature enacted non-resident withholding requirement.
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Nexus In 2012: Are Worlds About To Collide?
How could a French bus crash and a New Jersey junkyard affect a state’s ability to tax foreign owners of pass-through entities?
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Nexus In 2012: Are Worlds About To Collide? (Cont.)
Goodyear Dunlop Tires Operations, S.A. v. Brown (June 27, 2011)
• European Goodyear subsidiaries (Turkey, France, Luxembourg) manufactured tires overseas. The tires allegedly caused a bus accident outside Paris, killing two North Carolina teenagers on a soccer vacation.
• Subsidiaries had no direct presence or contact with North Carolina.
• Some of their tires made it to the North Carolina market via affiliates and independent parties.
• Lower courts mixed up the general/specific jurisdiction concepts and relied on a “stream of commerce” concept to assert jurisdiction over foreign subsidiaries.
• 9-0 U.S. Supreme Court reversed; no general personal jurisdiction over foreign actors
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Nexus In 2012: Are Worlds About To Collide? (Cont.)
J McIntyre Machinery Ltd v Nicastro (June 27 2011)J. McIntyre Machinery, Ltd. v. Nicastro (June 27, 2011)
• English manufacturer of metal-shearing equipment had no presence in New Jersey.
• Sold machinery to independent U S distributor (Ohio) which then • Sold machinery to independent U.S. distributor (Ohio), which then sold to New Jersey junk yard; machine mauled N.J. worker’s hand.
• “Stream of commerce” principle did not allow plaintiffs to sue foreign manufacturer in New Jersey courts; no personal jurisdiction foreign manufacturer in New Jersey courts; no personal jurisdiction over foreign actor.
• Did Due Process nexus standard just change, or was it just “clarified”?clarified ?
― “The principal inquiry in cases of this sort is whether the defendant’s activities manifest an intention to submit to the power of a sovereign ” power of a sovereign.
• 4/2/3 decision, so long-term implications difficult to predict.
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Nexus In 2012: Are Worlds About To Collide? (Cont.)
Remember Quill?
• Not just a Commerce Clause case!
• Court specifically recognized that Due Process and Commerce Clauses imposed independent nexus standards.
• Did U.S. Supreme Court just breathe new life into Due Process Clause and perhaps give us a new Quill?
• Are McIntyre and Goodyear (or at least their jurisdictional principles) working th i i t t t t ?their way into state tax cases?
― Red Earth, LLC (2011 Indian Internet tobacco case, U.S. 2d Cir.)
― Scioto (2012 Oklahoma intangibles tax case)
― Conagra (2012 West Virginia intangibles tax case)
― “Due Process and Personal Jurisdiction: Implications for State Taxes”, Denning, 64 State Tax Notes 837 (June 18, 2012)
― “Has the Due Process Clause Gotten Its Groove Back?”, Benton/Calhoun, State Tax Notes, 64 State Tax Notes 721 (June 4, 2012)
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Nexus In 2012: Are Worlds About To Collide? (Cont.)
The Million-DollarQ tiQuestion:
Could a private plaintiff haul your corporation before the courts in State X, if your only contact with the jurisdiction was a passive interest in a partnership or LLC operating in State X?
• Could that plaintiff establish personal jurisdiction over the corporation?
• If not why can State X subject you to taxation?If not, why can State X subject you to taxation?
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Bruce Ely, Bradley Arant Boult Cummings
APPORTIONMENT ISSUES
Bruce Ely, Bradley Arant Boult CummingsJohn Fletcher, General Electric Co.
Apportionment Of Pass-Through Entity Income By Corporate PartnersEntity Income By Corporate Partners
• Partner level v. entity level?
– Is business/non-business income determination made
Corp. Ptr 2Corp. Ptr 1
at:• The partnership level?• The partner level? Do thep
– Not much guidance; only a handful of states have addressed in public
P’Ship 2Do the factors flow up? Or, are the corp.p
guidanceOr, are the corp. partners stuck with partnership’s factors?
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factors?
Apportionment Of Pass-Through Entity Income By Corporate Partners (Cont )Income By Corporate Partners (Cont.)
• Partner level approach explained:– Partners combine their share of PTE’s apportionment factors
with their own apportionment factors. • Referred to as “flow-through” or “flow-up” apportionmentg p pp• Also known as “partner-level” apportionment
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Apportionment Of Pass-Through Entity Income By Corporate Partners (Cont )Income By Corporate Partners (Cont.)
• Partner level approach explained (Cont.):– Example
• Assume that a corporate partner has a 60% interest in a partnership. The corporate partner would calculate its own p p p papportionment factor by including 60% of the partnership’s sales, property and payroll (assuming that the state uses a three-factor apportionment formula), but usually only if the partner and the partnership are unitary (or a similar term).
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Apportionment Of Pass-Through Entity Income By Corporate Partners (Cont )Income By Corporate Partners (Cont.)
• Partnership level approach explained (Cont.):– PTE’s income is apportioned to the state using only the PTE’s
own apportionment factors.– Owners of the PTE then allocate their distributive share of post-p
apportionment income to the appropriate state.
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Apportionment Of Pass-Through Entity Income By Corporate Partners (Cont )Income By Corporate Partners (Cont.)
• Partnership level approach explained (Cont.):– Example
• Corporate partner has a 60% interest in a partnership, which earns $100 of income. $
• If apportionment is calculated at the partnership level, and the partnership computes a 50% apportionment factor in a state, then the partner would include $30 of partnership , p $ p pincome in its tax base in that state (which is 60% of the partnership’s income in the state after apportionment ).
Apportionment Of Pass-Through Entity Income By Corporate Partners (Cont )Income By Corporate Partners (Cont.)
• California – See Cal. Code Regs. tit. 18, §25137-1
• If partner are UNITARY with partnership, then partnership’s factors “flow through” to the partners.g p
• If partners are NOT unitary with the partnership, then the factors do not “flow through” to the partners.
• If partners and partnership are NOT unitary but the incomeIf partners and partnership are NOT unitary, but the income is considered business income, then partners must apportion partnership income separately from their other business income.
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Apportionment Of Pass-Through Entity Income By Corporate Partners (Cont )Income By Corporate Partners (Cont.)
• Florida – corporate income tax– Partnership factors flow through to the corporate partners .
• Apportionment occurs at the partner level.• (No issue for individuals because no personal income tax)(No issue for individuals, because no personal income tax)
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Apportionment Of Pass-Through Entity Income By Corporate Partners (Cont )Income By Corporate Partners (Cont.)
• Massachusetts– Partnership factors flow through to corporate partners, if
partnership and corporate partners are engaged in “related business activities.”
– If they are not engaged in related business activities, corporate partners separately account for partnership income and apportion it using only the partnership’s factors.
• If corporation owns less than 50% of LP, presumed not to be doing business in MA, and apportionment at partnership level
• Equally weighted, three-factor formulaq y g ,
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Apportionment Of Pass-Through Entity Income By Corporate Partners (Cont )Income By Corporate Partners (Cont.)
• New Jersey– Partnership factors flow through to corporate partners, if the
partnership and partners are unitary.– Special New Jersey rules of unity for corporate partners and p y y p p
partnerships– If not unitary, apportion partnership income at the partnership
level and report distributive share of apportioned taxable income p ppwithout regard to the partners’ separate apportionment factors
