What’s
Happening
Tuesday
December 13, 2011
Hosted by
GinnyAnn
Buckner
Kissling
Curry
Principal, Ryan, LLC
&
with
Fred Marcus
Matt
Lauer
Principal, Horwood, Marcus, and Berk, Chtd.
Doug Lindholm
& William McArthur
Chris Matthews
&
Council on State Taxation
Tyco Electronics
David Gregory
Program
Dale Busacker, Minnesota
Mike Yopp, Tennessee
Donna Lecky, Alabama
Eric Coffill, California
Jason Wyman, Illinois
Mark Eidman, Texas
Fred Nicely, Ohio
Pat Van Tiflin, Michigan
Program
Kurt Kawafuchi, Hawaii
John Barrie, Missouri / D.C.
Jonathan Block, Maine / New Hampshire
Jason Zorfas, Massachusetts
James Wetzler, New York
Dick Genetelli, New York
David Shipley, Pennsylvania / New Jersey
NEWS
BREAK
Presented by
Bill Townsend
Shareholder
Fowler White Boggs
Banker LLP
Marc Simonetti
&
Partner
Sutherland Asbill &
Brennan
FEATURING SPECIAL GUESTS:
Mr. Mark Eidman
Partner
Scott, Douglass & McConnico LLP
Austin, Texas
Mr. Fred Nicely
Tax Counsel
Council On State Taxation
Washington, DC
Mr. Patrick Van Tiflin
Partner
Honigman, Miller, Schwartz, and
Cohn LLP
Lansing, Michigan
FEATURING SPECIAL GUESTS:
Mr. James Wetzler
Director, Multi-State Tax Group
Deloitte Tax LLP
New York, New York
Mr. Richard Genetelli
President
The Genetelli Consulting Group
New York, New York
Mr. David Shipley
Partner
McCarter & English, LLP
Philadelphia, Pennsylvania
PowerPoint Presentation
To access this presentation, go to:
www.saltlawyers.com
Minnesota Developments
Mr. Dale Busacker
Director, State and Local Taxes
Grant Thornton LLP
Minneapolis, Minnesota
2011 Legislative Update
•
Federal Income Tax Update Through April 14, 2011
– Adjustment continued for bonus depreciation and Section
179 expensing
•
•
Sales tax – data center exemption
Ban on contingency fee tax compliance assistance contracts
with vendors
Ringtones are no longer subject to sales tax
•
Pending Litigation
•
R. J. Reynolds Tobacco Company
•
In 1999, R. J. Reynolds Tobacco Company (Reynolds) and affiliates sold the international
tobacco brands and operations of an affiliate located in Switzerland. Reynolds included the
gain as apportionable business income and included the gain in the sales factor
denominator.
•
The Department issued its audit excluding the gain from the sales factor denominator.
•
Reynolds protested the assessment and filed a refund claim taking the position that the
gain is nonbusiness income.
•
The Department denied the protest and the refund claim.
•
Reynolds filed in Tax Court and the Court heard the summary judgment motion on April 27,
2011.
Pending Litigation
• SAP Retail, Inc.
• SAP sold $11.5 million of prewritten software to Best Buy along with $7 million
of consulting and professional services.
• The Department assessed sales tax on these services as fabrication labor or
as installation charges. The Department exempted invoices where the
software code was modified.
• SAP's position is that these services are exempt consulting and professional
services. SAP especially objects to the Department assessing tax on
reimbursements that it received from Best Buy for expenses that its
employees paid for airfare, car rental, hotel charges and meals.
Pending Litigation
• Express Scripts, Inc.
• Issue 1 – Taxpayer asserts that since they own only a 1/3 interest in
the partnership, the partnership income or loss is directly allocated as
non-unitary, non-business income.
• Issue 2 – Taxpayer asserts that the statute does not require
apportionment of the Section 382 limit on the use of NOL carryovers.
Pending Litigation
• SBC DataComm, Inc.
• Taxpayer is taking the position that holding companies whose only
asset is holding an interest in US partnerships qualify as a foreign
operation company during 2000 and 2001. The position is that the
apportionment factors don't flow up in the determination if the entity
qualifies as an FOC. The FOC qualification laws were significantly
changed in 2005 and in 2008.
Administrative Update
•
Worker Classification Voluntary Compliance
− Initiative expires December 16
− Pay 3% tax on compensation paid to affected workers during 2010
and treat them as employees going forward
− Waiver of penalties and interest and prior liabilities
•
E-services online filing and paying system
− Filing returns and paying taxes
− Viewing correspondence and receiving messages
Tennessee Developments
Mr. Mike Yopp
Partner
Waller Lansden Dortch & Davis, LLP
Nashville, Tennessee
Alabama Developments
Ms. Donna M. Lecky
Vice President, Tax
Omnicare, Inc.
Covington, Kentucky
Business/Nonbusiness Income
• Functional and transactional changed from
“and” to “or”
• Blue Bell Creameries, LP v. Roberts - Capital
gains from redemption of stock are Business
Earnings - sale was unrelated to ice cream but
materially contributed to Blue Bell’s earnings
• Heinz v. Farr – Same result
• Lesson: Any sale in Tennessee will be
business earnings.
Legislative Developments
•
•
•
•
Incentives added for firms already head quartered in
Tennessee that remodel or renovate
Gain from deemed sale of Goodwill in Sec. 338
Election excluded from both numerator and
denominator of Receipts Factor
Refund claims may now be extended by agreement –
eliminates necessity for litigation
Interest on refund claim legislation passed last year in
dispute
Revenue and Letter Rulings
• After two year hiatus is rulings, approximately
30 rulings released since change in
administration
• Will not give duplicate rulings – but will give
comfort letter
• Expedited Rulings; $10,000; 7 day/60 day
Variance Procedure
• Comptroller studied the issue and noted that
under Commissioners Chumley and Farr use
increased significantly
• Unlike penalty and refunds which can be
reviewed by Tennessee Attorney General office,
no way to monitor variances.
• Expect variance legislation
Other Cases
•
•
CAO Holdings, Inc. v. Trost - In order to pierce have a
sham transaction ..., two principles apply. First, “[f]orm and
structure are frequently … controlling… .” Second,
taxpayers can arrange their affairs to minimize taxes
Signal Mountain Cement – Federal capitalization rules do
not control Tennessee property tax valuation – exclude
freight, sales tax, installation costs
Alabama Developments
Ms. Donna M. Lecky
Vice President, Tax
Omnicare, Inc.
Covington, Kentucky
Alabama Developments
• Corporate Income Taxes: Double Weighted Sales Factor and
Market-Based Sourcing. Amendment of Act 2011-616.
• The Tariff Credit Act 2011-648 and Related Challenges: Gibson v.
Bentley, Case No. CV 2011-900998 (August 3, 2011).
• IRC Section 199: Domestic Production Activities Deduction:
Taxable income limitation. GKN Westland Aerospace, Inc. v State
DOR, Admin. Law Div. Dkt. No. BIT. 10-988 (July 25, 2011).
• Sales and Use Tax: Alabama Streamlined Sales Tax Commission
Issues Landmark Report.
• Outlook for 2012: Alabama Taxpayers Bill of Rights, H.B. 427
Act 2011-616 Amended
• Alabama’s version of the Multistate Tax Compact amended to
double-weight the sales factor in the currently equally weighted
3 factor formula used to apportion income in the State;
• The Act amends Alabama’s apportionment methodology by
converting the State from a cost of performance to a market
source state for certain receipts from intangibles or services.
Effective for tax years beginning on or after December 31, 2010;
and,
• The market-based sourcing rule in the bill closely tracks the
Multistate Tax Commissions draft model provision.
The Tariff Credit Act of 2011
• Act 2011-648 is designed to:
– Encourage foreign manufacturers to locate in Alabama by
providing an income tax credit for investing in qualifying
projects;
– Minimum capital investment is $100M;
– Activities that qualify are industrial, warehousing and
research;
– The project must create 100 new jobs; and,
– The credit shall not exceed the lesser of $20M or 20% of the
total amount of the investing Company’s capital investment.
Gibson v. Bentley
• Challenge to the Tariff Credit Act by 2
Teachers. Lawsuit funded by the AEA
Teachers Union
• Basis-Technical Argument:
• Section 70 of the 1901 Alabama Constitution
requires that all bills for raising revenue must
originate in the House of Representatives not the
Senate.
GKN Westland Aerospace, Inc. v.
State Department of Revenue
• Case of First Impression:
– Held that a corporate taxpayer properly calculated its IRC
Section 199 domestic production activities deduction (“DPAD”)
by applying the taxable income limitation on a separate
company basis for Alabama tax purposes;
– At issue was the income limitation. The Judge reasoned that
the taxable income limitation did not apply to the subject years
because the Taxpayer had income as a separate company in
those years greater that the allowable DPADs; and,
– The ADOR did not appeal.
Sales and Use Tax
• Alabama Streamlined Sales Tax Commission:
– Commission charged with studying the feasibility of the State
becoming a member of the Streamlined Sales and Use Tax
Agreement;
– The Commission, in its preliminary report, agreed that the ADOR
would be the ‘single entity administrator’ (“SEA”) should Congress
enact certain legislation recently introduced;
– If Congressional legislation is enacted along with state conforming
legislation, the ADOR would become the SEA for both filing and
auditing; and,
– Possible outcome: increased annual sales tax revenue ranging $200M
to $240M.
Outlook 2012: The Re-Introduction of
Alabama H.B. 427
•
Introduced in the Spring, 2011:
– Would have created an independent tax tribunal-the Alabama Tax
Appeals Commission-thus abolishing the Administrative Law Division;
– H.B. 427 was passed unanimously by the House last session and
received a favorable vote from the Senate Judiciary Committee before
stalling in the Senate logjam during the last few days of the session;
and,
– The bill contained other important provisions such as,
• Extending the time period for filing an appeal or petition from 30 to 60
days, and
• Eliminating the failure to file penalty for individual taxpayers who are
due refunds on a delinquent \return
California Developments
Mr. Eric J. Coffill
Partner
Morrison & Foerster LLP
Sacramento, California
FTB ADMINISTRATIVE DEVELOPMENTS
• FTB Notice 2011-06: “Doing Business” Standard
FTB ADMINISTRATIVE DEVELOPMENTS
• Results of VCI 2 Program (ended October 31, 2011)
FTB ADMINISTRATIVE DEVELOPMENTS
• Adoption of 25138.5 Single Sales Factor Regulation
FTB ADMINISTRATIVE DEVELOPMENTS
• Internal “Business Income” Confusion
•
Appeal of Pacific Bell Telephone (September 20, 2011)
FTB JUDICIAL DEVELOPMENTS
• California Taxpayers’ Ass’n v. FTB (2011)
• Apple Inc. v. FTB (2011)
• The Gillette Co. v. FTB (Multistate Tax Compact
Cases)
Illinois Developments
Mr. Jason Wyman
Partner
Deloitte Tax LLP
Chicago, Illinois
Illinois — Legislative Action
• SB 2505, P.A. 96-1496 signed January 13, 2011
• Corporate Income Tax Rate
• 1/1/2011 – from 4.8% to 7%
• 1/1/2015 – from 7% to 5.25%
• 1/1/2025 – from 5.25% to 4.8%
• Replacement Tax unchanged at 2.5% on corporations
• Fiscal Year Taxpayer Impact
• Weighted Average
• Specific Accounting
Illinois — Legislative Action – Cont'd
• SB 2505, P.A. 96-1496 signed January 13, 2011
• Personal Income Tax Rate
• 1/1/2011 – from 3% to 5%
• 1/1/2015 – from 5% to 3.75%
• 1/1/2025 – from 3.75% to 3.25%
• Net Operating Loss Carryforward Absorption Suspension
• Tax Years Ending after 12/31/2010 and before 12/31/2014
• Carryover period extended by suspension years
• Fiscal Year Taxpayers – four year suspension
• Final Year Returns – NOL Carryforwards Lost
Illinois — Legislative Action – Cont'd
• HB 2955, P.A. 97-0507 signed August 23, 2011
• Technical Corrections Bill
• Full or Partial Combination of Holding Companies
• Definition – largely intangible receipts
• Pro-rata inclusion or other reasonable method, consistently
applied
• Notable for organizations with multiple Illinois filings – Section 304 (b),
(c), or (d).
Illinois – Veto Session Tax Legislation
• Two versions – nearly identical (SB 397 and HB 1883).
• HB 1883 passed with supermajority in Senate, defeated in House by a
vote of 99 to 8, with six House Members voting present
• Notable Exclusion – no decoupling from Bonus Depreciation in
2011
• Differences
• Earned Income Tax Credit – HB 1883 increased to 10% vs
7.5%
• Personal Exemption – HB 1883 allowed personal
exemption to be indexed to CPI
• Live Theatre Production Credit – HB 1883 capped at $2M
vs $1M
Illinois – Veto Session Tax Legislation – Cont’d
•
Other provisions
• Independent Tax Tribunal to hear tax disputes; organized separate and
independent from Department of Revenue
• NOLs – most recent version allowed 100k absorption for tax years ending
on or after 12/31/2012
• Prior versions - full absorption
• Fiscal Year Taxpayer Impact
• Elective change in apportionment formula for exchanges
• Sunset extension for all tax exemptions, credits and deductions scheduled
to expire in 2011, 2012 and 2013 for another five years, including R&D tax
credit.
• Edge Tax Credit for Sears and extension of economic development
agreement in Hoffman Estates
• Estate Tax Exclusion increases
Illinois – Veto Legislation - Current
• HB 1883 Split into two bills
• SB 397 – Business Provisions
• SB 400 – Individual Provisions
• Passed House – 12/12/2011
• Senate Vote - Today
Illinois Click-through Nexus Updates
Overview and Developments
– HB 3659 - effective 7/1/11
– NY-style click-through provisions without “rebuttable presumption”
– Also provided for affiliate nexus for out-of-state sellers with relationship
with in-state sellers selling same type of product using same trade
name or trademark.
– Various Internet retailers announced intention to sever any potential
nexus creating relationships with in-state sellers and in fact terminated
these relationships following passage of the law.
Illinois Click-through Nexus Updates
Efforts to repeal
• At least two bills have been introduced repealing or modifying effect of
HB3659:
– HB3869 (Dave Winters (R), Rockford)
» Amends the effective date of the definition change to retailer
maintaining business inside the state to end “on the first day of
the month to occur not less than 30 days after the effective date of
the Amendatory Act.”
» Referred to Rules Committee, 10/27/11.
– SB1783 (Antonio Munoz (D) Chicago)
» Made changes to affiliate nexus in existing statute and declared
that “an advertising link or affiliate marketing link is not sufficient
to qualify a retailer as a retailer maintaining a place of business in
this State.”
» Introduced 2/9/11, last action 3/18/11 Re-referred to Assignments.
Illinois Click-through Nexus Updates
Performance Marketing Association v. Hamer
– United States District Court – Northern District of Illinois (filed 6/1/11)Complaint for Declaratory Relief
– Basis:
• Act violates the Commerce Clause.
• Act allows IL to impermissibly regulate commerce outside its borders.
• Act violates "Internet" Tax Freedom Act.
– Relief
• Declaration that “definition of retailer maintaining business in Illinois”
contained in Act is unconstitutional under Commerce Clause and Quill and
violates "Internet" Tax Freedom Act.
• Permanent Injunction against enforcement.
Illinois Click-through Updates – Pending
Litigation
Performance Marketing Association v. Hamer
– Circuit Court of Cook County (filed 7/27/11)- Complaint for Declaratory
Judgment and Permanent Injunction
– Key Allegations
• Act affects the livelihood of approximately 9,000 companies in Illinois that
have been negatively affected by passage of the law and subsequent
cancellation of contracts with online retailers.
• Act lacks specificity related to $10,000 in four calendar quarters provision
that would limit such revenue to Illinois connected transactions.
• Act discriminates against Internet commerce.
• Use tax sought to be collected by Act is already due from IL businesses and
residents and there is a mechanism in place for reporting (ST-1, ST-44, IL
1040).
Illinois Click-through Updates – Pending
Litigation
Performance Marketing Association v. Hamer
– Circuit Court of Cook County (filed 7/27/11)- Complaint for Declaratory
Judgment and Permanent Injunction
– Basis:
• Act violates the Commerce Clause
• Act allows IL to impermissibly regulate commerce outside its borders
• Act violates "Internet" Tax Freedom Act
– Relief
• Declaration that “definition of retailer maintaining business in Illinois”
contained in Act is unconstitutional under Commerce Clause and Quill and
violates "Internet" Tax Freedom Act
• Permanent Injunction against enforcement
Taxability of Computers, Software, and
Related Systems – Illinois
Access to Online Database is Not Taxable if No Transfer of Software and/or TPP
– ST 11-0052 GIL, Ill. Dept. of Rev. 6/30/11.
– Issue: Whether access to an online database of information is taxable.
– Ruling : Service is not taxable.
Digital Signatures Generally Not Taxable; Related Software May Be Taxable
– ST 11-0015 GIL, Ill. Dept. of Rev. 3/29/11.
– Issue: Whether a digital signature or identification service is taxable.
– Ruling:
• Service not considered "computer software" and therefore is not subject to
tax.
• However, any software used to create, encrypt, decrypt or read a digital
signature is considered to be software and may be taxable.
Illinois Home Rule Updates – Pending
Litigation
Regional Transportation Authority v. City of Kankakee et, al.
– Circuit Court of Cook County (filed 8/23/11)
• Key Allegations
– Localities distributing local sales tax revenue to companies sourcing
sales to sham offices
– Companies set up structure to avoid paying locally imposed taxes,
including higher cook county rate
– Complaint seeks damages to compensate for loss of tax revenue due
to municipalities unlawful conduct
– City of Chicago v City of Kankakee et, al. filed same day limited to
1/1/2004 and forward
FEATURING SPECIAL GUESTS:
Mr. Mark Eidman
Partner
Scott, Douglass & McConnico LLP
Austin, Texas
Mr. Fred Nicely
Tax Counsel
Council On State Taxation
Washington, DC
Mr. Patrick Van Tiflin
Partner
Honigman, Miller, Schwartz, and
Cohn LLP
Lansing, Michigan
Constitutional Challenges
• In re Allcat Claims Service, L.P. and John
Weakly, Cause No. 11-0589.
• Nestle USA, Inc., Switchplace, LLC and
NSBMA, LP v. Combs, Cause No. 11-0855
Texas
In re Allcat Claims Service
• Constitutional Issue
– Bullock Amendment:
• No state income tax without voter approval
– Margin Tax
• Is an income tax = it taxes a natural person’s share of
partnership income
– Texas voters never approved the Margin Tax
Texas
In re Allcat Claims Service
• Supreme Court’s Decision—Constitutional Issue
– Texas abandoned the aggregate theory of
partnerships in favor of the entity theory
– Therefore, the Margin Tax is a tax on Allcat as an
entity, not a tax on the net income of its natural
person limited partners.
– The facial challenge is without merit
Texas
In re Allcat Claims Service
• Jurisdictional Issue
– Can facial and/or as-applied constitutional
challenges be brought directly to the Texas Supreme
Court without lower court review?
• Facial = yes
As-applied = no
Texas
Nestle USA v. Combs
• Constitutional Issues
– Lack of uniform treatment for similar taxpayers by
the Margin Tax leads to violations of:
•
•
•
•
Equal and uniform clause of the TX Constitution
Equal protection clause of the US Constitution
Commerce clause of the US Constitution
Due process clause of the 14th Amendment
Texas
Nestle USA v. Combs
Argument:
– Some classifications and distinctions made by the
Margin Tax rules bear no reasonable relationship to
the tax’s purpose—a tax on the privilege of doing
business in the state.
– E.g., “total revenue” is not equal among taxpayers,
some deductions not available to all taxpayers, rate
discounts not tied to privilege of doing business
Texas
New Refund Procedure
•
Comptroller Rule 3.325
– Replaced effective July 19, 2011
– Laundry list must be stated “fully and in detail” for a valid
refund claim
•
•
•
•
•
•
Purchaser’s / seller’s name
Invoice number
Date, description of item
Specific reason for refund
Total amount of refund request
Identification of all taxing jurisdictions involved
Texas
New Letter Ruling Procedure
• Two tier system
– General Information letters applying law to a general
set of facts (nonbinding)
– Declaratory rulings applying law to specific facts for
an individual taxpayer (binding, but only for individual
taxpayer)
• New procedure will be written into Comptroller
rules.
Texas
Litigation
• Grocers Assoc. et al. v. Wilkins
– Ohio Supreme Court held that the CAT is akin to a “franchise tax” and
accordingly the measurement of the privilege may include non-taxable items
such as food
• Overstock.com v. Levin
– “Substantial nexus” challenge based on $500,000 in taxable gross receipts –
case dismissed because tp was not assessed
• Beaver Excavating v. Levin
– CAT on motor fuel upheld
– TP appealed to Ohio Supreme Court on 9/9/11 – discretionary
• L.L. Bean, Inc. Final Determination (issued 8/10/2010)
– Asserting Ohio has the ability to impose the CAT on a taxpayer lacking a
physical presence in the state
Ohio
– Case is now pending before the Ohio Board of Tax Appeals
Ohio CAT – Revenue
• Three CAT Measurement Periods – adjustment to rate
only if CAT over collects
• Actual Collections – 1st Measurement Period:
– FY 2006-07:
$868.3M - Target: $815M [+ 6.5%]
• Actual Collections – 2nd Measurement Period:
– FY 2009:
$1.18B - Target: $1.19B [-1%]
• Actual Collections – Final Measurement Period:
– FY 2011:
$1.45B - Target: $1.61B [-10%]
Ohio
Administrative Update – Voluntary Disclosure
Agreements (VDAs)
• Information Release CAT 2008-01 – Revised September 2010
• Allows VDA for CAT
– Interest only – no penalties (as long as taxpayer never contacted via
audit/compliance)
– Beginning January 1, 2011, a look back period of 3 years plus
current year
•
VDA Stats*:
– Total Requests Received: 539
• Total Requests Cancelled: 104
– Total Requests Completed: 284
– Total Amount Collected: $ 8,373,972
* Statistics as of October 31, 2011
Ohio
CAT Division’s Nexus Unit
•
•
Began November 2009
Current Statistics*:
– Letters Sent: 12,793
– Registered Taxpayers: 4,591
– Nexus Assessments Issued: 709**
– Collected $19,220,999
– Will issue estimated assessments
• Includes 55% penalty
• $1,000 penalty for failure to register
• *Statistics as of December 5, 2011
** Per taxpayer figure
Ohio
2011 CAT Legislation
• Sub. H.B. 58 - Effective March 7, 2011
– Creates a refundable jobs retention tax credit for eligible businesses
that meet certain conditions
– Department of Development must recommend the granting of this
credit prior to July 1, 2011
• H.B. 114 Effective March 30, 2011
– Adds an exclusion for receipts from like-kind exchanges of petroleum
products, including motor fuel
– Uncodified law makes this section effective back to July 1, 2005
Ohio
2011 CAT Legislation
• Am. Sub. H.B. 153 (Budget Bill) - Signed June 30, 2011
– Among other things, Changes distribution of CAT funds to funnel more
revenue to the GRF
• Decreases funding to local jurisdictions and increases amounts to GRF
• 2012 prior to legislation – 5.3% to GRF now 25% to GRF
• 2013 – 50% to GRF with legislation
• Am. Sub. H.B. 277 - Signed July 15, 2011
– Adds exclusion for receipts in excess of a licensed casino operator’s gross
casino revenue
– Casinos now only taxed on net receipts (gross receipts after winnings)
Ohio
Pending Legislative Proposals in 2011
Impacting CAT
•
•
•
•
•
•
•
•
H.B. 10 – As Introduced
H.B. 18 – As Introduced
S.B. 47 – As Introduced
H.B. 220 – As Introduced
H.B. 261 and S.B. 188 – As Introduced
S.B. 184 – As Introduced
S.B. 206 – As Introduced
H.B. 327 – As Introduced
Ohio
Two Ohio Amnesty Programs
•
Current Use-Tax Amnesty Program – 10/1/2011 to 5/1/2013
– Companies that enter the program must remit all use taxes incurred
since January 1, 2009
– Waiver of interest & penalties and prior periods liability forgiven – can
enter into payment plan
•
General Amnesty Program – 5/1/2012 to 6/15/2012
– In general, allows taxpayers to resolve tax liabilities that are paid to the
Ohio Department of Taxation
– Must pay all taxes due as of May 1, 2011 plus ½ interest
– Penalties and remaining ½ interest will be waived
– No payment plan is available
Ohio
Ohio BTA Report & Budget Situation
• BTA has been flooded with a record number of appeals
– Most are property tax appeals (80% to 90%).
– The Committee anticipates the number of appeals pending before the BTA will exceed
10,000 by the end of FY 2012.
• The Commissioner’s proposals include the following:
–
–
–
–
–
Creation of a small claims process
Acceptance of the Backlog Assistance Program
Improvement of the BTA’s current technology
Development of a formal Case Management Program
Adoption of uniform rules of practice and procedure for county boards of revision
• Ohio Projected Budget Shortfall FY2011 - $3 billion (according to Center on
Budget and Policy Priorities)
Ohio
Nexus - Three Statutory Tests
• Physical presence of more than one day during the tax
year, or
• Active solicitation of sales in Michigan and $350,000 or
more in gross receipts sourced to Michigan, or
• An ownership interest or beneficial interest, either
direct or indirect in one or more a flow-through entities
that has substantial nexus.
Michigan
Certificated Credits
• Definition includes MEGA and other
discretionary payroll based credits
–
–
–
–
–
Election required
Retain credit, stay on MBT
Forgo credit, file under CIT
Election in place until last $ of credit is used
Election must be made on first return
• Brownfield and State Historic credits have a
cash-out mechanism at .90
– No requirement to stay on MBT
Michigan
Unitary Business Group
• Definition differs from MBT definition
• Only includes “C” corporations, insurance
companies or financial institutions
– Does not include a “foreign operating entity,” defined
same as under MBT
Michigan
Withholding – For Entities
•
•
•
•
•
New to Michigan
Applies to flow through entities if > $200,000 of
business income after allocation or apportionment
Withheld from the distributive share of the business
income of the member
Members of a flow through entity that are also flow
through entities are also required to withhold.
Credit will be given for withholding by lower tier flowthrough entity
Michigan
Timeline
12/31/06 2/31/07 12/31/08 12/31/09 12/31/10 12/31/11 1/1/12 -12/31/12
SBT
•
•
•
•
SBT
MBT
MBT
MBT
MBT
CIT
Many SBT Tax Years Open
MBT Audits Only Recently Begun
MBT Tax Years Open as Late as 12/31/2016
Election to continue under MBT – Certificated credits
Michigan
SBT Apportionment
•
•
•
•
•
Cost of Performance
(TPP vs SVC)
Sales Representation
Population Factor
Destination
Michigan
SBT
•
•
•
•
MTC Election
SBT Nexus
SBT CAD
SBT Unitary
Michigan
Hawaii Developments
Mr. Kurt Kawafuchi
Former Director, Hawaii Department of Taxation
Hochman, Salkin, Rettig, Toscher, & Perez
Honolulu, Hawaii
HAWAII
Act 105:
Suspension of General Excise and Use Tax Exemptions
and Deductions
• Suspends many exemptions and deductions for 2 years:
7/1/11 through 6/30/13
– e.g., subcontractor and sublease deductions, sales of TPP to
federal government
• Grandfather Rule (TIR 2011-10)
– Written contract prior to 7/1/11; Prohibit tax increase
• Reporting Requirement (TIR 2011-4)
• Many exempt organizations not impacted by suspension
(TIR 2011-01)
HAWAII
Act 1: Civil Unions
• Treated Like married couple
–
–
–
–
–
–
Income Tax
Estate and Transfer Tax
Tenants by Entirety?
Family Law
Health insurance and employee benefits
Federal Differences
• Effective 1/1/2012
HAWAII
Act 161
Permitted Transfers for Trusts
• Eliminated 1% tax
• Removed 25% restriction on maximum
percentage of assets that can be transferred to
such trusts
• Relaxed Asset Type: Now virtually any type of
asset
HAWAII
CompUSA v. Director of Taxation
• Hawaii Supreme Court in a published opinion:
CompUSA liable is for 0.5% use tax (wholesale
tax rate, i.e., resale of inventory) on “keeping
the property (inventory)” in Hawaii for “sale.”
Reversed unpublished intermediate Court of
Appeals Decision in favor of taxpayer.
Government had initially prevailed at trial level.
Missouri Developments
Mr. John Barrie
Partner
Bryan Cave LLP
New York City, NY
Washington, DC
MISSOURI – Reduced Sales Tax On Food
Purchases Found Not To Apply To Sales of
Donuts
• Krispy Kreme Doughnut Corporation v. Director of Revenue, Missouri
Administrative Hearing Commission, December 23, 2010
• Good News: donuts eligible food
• Bad News: lower sales tax rate not applicable if more than 80% of
donuts sold for “immediate consumption”
• “immediate consumption” means “without further preparation” not
“immediately consumed”
MISSOURI – Theater Concession Food
Sales not Subject To Reduced Sales Tax
Rate
• Wehrenberg, Inc. v. Director of Revenue, Missouri
Supreme Court, October 4, 2011
• Only food sold for home consumption qualifies for
reduced sales tax rate
MISSOURI – Taxpayer Not Liable For Use Tax
On Purchase of Parts Used In Contracts With
Federal Government
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•
•
Custom Hardware Engineering and Consulting, Inc. v.
Director of Revenue, Missouri Administrative Hearing
Commission, December 2, 2010
Under applicable Federal Acquisition Regulations, title to
parts pass directly to federal government
Compare purchases pursuant to non-federal government
contracts – purchase of parts would be subject to use tax
MISSOURI – Taxpayer Lacked Standing to
Challenge Constitutionality of a Tax Credit
• Barbara Manzara, et. al. v. Director of Revenue, Missouri
Supreme Court, August 2, 2011
• Taxpayer challenged Distressed Areas Land Assemblage
Tax Credit Act on basis allowance of the tax credits
provided an unconstitutional grant or lending of public
money to private persons
• No standing -- test is whether a direct expenditure of funds
-- tax credits do not involve a direct expenditure
Section 338(h)(10) Developments
2011 District of Columbia Developments
• Combined reporting required for taxable years
beginning after December 31, 2010
• However, cannot offset losses
• Double–weighted sales factor
• Internet sales tax
Maine / New Hampshire Developments
Mr. Jonathan Block
Partner
Pierce Atwood LLP
Portland, Maine
Massachusetts Developments
Mr. Jason Zorfas
Executive Director, Indirect Tax Services
Ernst & Young LLP
Boston, Massachusetts
Maine: Act to Promote Fair
and Efficient Resolutions in
Tax Disputes
CURRENT ADMINISTRATIVE APPEAL SYSTEM
• Not independent
• Hearing officer employed by Maine Revenue
• Decision must be approved by numerous people, including
Audit Division
• Ex Parte communications encouraged
• Little emphasis on settlement
• De Novo review to Superior Court
Maine: Act to Promote Fair and
Efficient Resolutions in Tax Disputes
NEW SYSTEM
• More independent hearing officers, appointed by Commissioner of Finance not
State Tax Assessor
• Charged with making an independent determination based on the law and the
evidence
• Ex parte communications prohibited; sign-offs eliminated
• Settlements encouraged
• Still entitled to de novo review by Superior Court
• Takes effect July 2012
• New taxpayer advocate position created by Legislature to assist taxpayers in
dealing with Maine Revenue
Disrespecting Professional Corporations
Luker v. Assessor
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•
•
•
•
•
Maine law firm with a few partners resident in New Hampshire
NH resident partners each formed PCs to hold their partnership interest and became
employees of their PC’s
Result was that the Maine income tax liability of the partners was cut-off due to the fact that
the PC’s had little or no income, and the NH partners were nonresident employees of the
PC’s
Maine Revenue assessed the individual partners as if the PC’s did not exist and as if the
NH residents were still partners of the law firm
Maine Supreme Court upheld this treatment under Assignment of Income theory, as if the
NH residents had assigned partnership distributions to their PC’s
Court left room to argue in a case with better facts
Aircraft Use Tax
• Maine Revenue launched program of assessing use tax on private aircraft that
landed in Maine
• The tax was challenged on constitutional and statutory grounds
• Two test cases decided by the Maine Supreme Court
• Statute exempted sales of property “purchased and used” outside the State of
Maine
• Court held that use tax did not apply if plane was substantially used outside of
Maine
CASE A:
Aircraft present in Maine for 21 days. Held substantially used outside of Maine. Assessment
overturned. Blue Yonder v. State Tax Assessor.
CASE B: Aircraft present in Maine for 156 days, outside for 209 days. Held not substantially used outside of
Maine. Assessment upheld. Victor Bravo v. State Tax Assessor.
Aircraft and parts now entirely exempt under recent Legislation.
New Hampshire Developments: Reasonable
Compensation Deduction
•
•
•
•
•
•
Because NH has no personal income tax, reasonable comp deductions were frequently
audited by NH DRA
New legislation applies to reasonable comp deduction allowed to owners of partnerships,
LLC’s, sole proprietorships that file as a partnership
Shifts burden of proof to Department to show that the amount of the deduction was not
reasonable under certain circumstances
Adopts IRC section 162 standards (including regs, rulings and court cases) to determine
amount of the deduction
Once business proves that person actually provided personal services to the business
during the tax period, the amount of the claimed deduction is deemed reasonable unless the
Department proves by preponderance of the evidence that the deduction claimed by the
business organization is clearly unreasonable
Business must still maintain records necessary to determine comp deduction was
reasonable, unless it elects record-keeping safe harbor (up to $50,000 deduction). Laws
2011, c. 207
Massachusetts Developments
Mr. Jason Zorfas
Executive Director, Indirect Tax Services
Ernst & Young LLP
Boston, Massachusetts
Combined reporting
TIR 10-16 (4 April 2011)
– Guidance on the tax treatment of a foreign corporation with US income exempt
from federal tax pursuant to a bilateral US Income Tax Treaty
– Income of foreign affiliates not subject to US income taxation under a treaty or
the IRC is not included in combined income
– Apportionment factors and deductions relating to such income are disregarded
– Such income is counted for purposes of determining the inclusion of the foreign
affiliate in the group under the 20% gross income test
– Foreign corporations whose income is excluded may still be required to file
returns and pay non-income tax on a separate company basis
Net operating loss deductions
Massachusetts
– Rev. Directive 10-5 (9 September 2010) – Provides guidance on the
application of the NOL carry forward limitation in the combined reporting
regulations where the member’s losses were incurred in tax years when
it was subject to a different apportionment method (e.g., ssf vs. three
factor).
– Directive requires use of current year method to determine limitations.
– S.B. 2582 (enacted 5 August 2010) – Extends the NOL carryforward
period from five years to 20 years, effective for tax years beginning on
and after 1 January 2010
Recent cases
– Kimberly-Clark (Mass. App. Tax Bd.) – Department of Revenue properly
disallowed deductions for interest, royalty and rebate expenses related to
taxpayer’s cash management system
– Talbots Inc. (Mass. Ct. App.) – Retailer not entitled to deduct royalties paid to a
wholly owned Intangible Holding Company for use of its trademarks because
the transactions were shams
– IDC Research (Mass. App. Ct.) – Parent company is liable for corporate excise
tax on royalty income received by the holding company because that
transaction at issue is a sham, lacking economic substance and a valid non-tax
business purpose
– Sysco (Mass. App.Tax Bd.) – Department of Revenue properly disallowed
interest expense deduction in a cash management system where there was no
written note and no evident intention to repay
Legislation
•
Reduced rates for corporations (8.25% for 2011 and 8% for 2012) and financial
institutions (9.5% for 2011 and 9% for 2012). Rate also reduced for S
corporations.
– Legislation postpones availability of “FAS 109” (relating to certain increases in
deferred tax liability caused by the adoption of unitary taxation) to 2013 tax
years. Originally the deduction was available over seven tax years beginning
in 2012.
– Legislation reduces interest on underpayments where audit takes longer than
18 months:
• 2 percentage point reduction for 18-36 months
• 2.5 percentage point reduction for 36 months and thereafter
• Taxpayer must respond to audit requests with “reasonable promptness
and completeness”
• Effective for audits beginning on or after 1 July 2011
Legislation (cont.)
• Proposed bill H. 1731
– New York style affiliate nexus
– Applicable only if gross receipts from sales to MA
residents referred to the retailer exceed $10,000 during
the prior year
Filing issues
– Seven month extension for combined report filers.
Taxpayers have to apply for the extension. Rev.
Directive 11-5.
– Legislation allows refund claims to be filed within
three years of filing date. Under prior law refund
claims had to be filed within three years of original
due date. Effective for all tax years that were open to
refund claims as of 1 July 2011
Year End Considerations
Securities Corporations
– Securities Corporation – No Net Worth Tax, 1.32% Tax on Gross Income
– Draft Directive 11-XX places estrictions on the ability to pledge the stock of
security corporations
• Effective 10/1/2011, parents of security corporations may not pledge more
than 50% of security corporation’s stock and may not pledge to restrict the
scope of investments or activities of the security corporation
• Draft Directive permits a security corporation to sell appreciated assets
acquired from affiliates to third parties without losing its status as a security
corporation. Security corporation must have purchased the stock for
investment purposes and not for tax planning purposes
Year End Considerations
Manufacturing Corporations
– Manufacturing Classification
• Benefits: Investment Tax Credit, Sales/Use Tax Exemptions for Certain
Purchases Used in R&D
• Qualification: Substantially Engaged in a Qualifying Manufacturing Activity
in the State
• Deadline for Application as a Classified Manufacturing Corporation:
January 31, 2010
Sales Tax
Letter Ruling 11-2
– Charges for core on-line service offerings, which allow customers to access the
company's database containing commercial information about the financial condition of
businesses, and updated data packages, which allow customers to access additional
data, are not subject to Massachusetts sales tax
– Sales/use tax, however, applies to charges for workflow add-ons (including a decision
making tool, an on-line credit application, a collection tool, an account manager, and web
services), as the sale of a right to use prewritten software that is hosted by the company
or a third party server
– The distinction between the taxability of these transactions, the Department of Revenue
explained, is that the object of the core service offerings and the updated data packages
is to obtain information, while the object of the workflow add-ons is to access the
company's software for the purpose of manipulating information that the customer
inputs as well as information from the database to accommodate current business
needs.
Sales Tax (cont.)
Letter Ruling 11-3
– Sales of authentication services through a digital
certificate are not subject to sales and use tax when
provided to customers located in Massachusetts.
Letter Ruling 11-4
– Charges to access online database to obtain information and reports (without the
licensing of the software) is not subject to sales and use tax.
– In essence, if the service in question is a passive exchange of information rather
than software actively manipulated and controlled by the end user, it may not be
subject to Massachusetts sales and use tax
Sales Tax (cont.)
Letter Ruling 11-5
– Pharmaceutical compounds shipped to fill/finish
manufacturers that placed the compounds in vials and
shipped them out of state were not subject to use tax, as
the compounds were in MA only temporarily.
Letter Ruling 11-7
– Solar powered electrical generation equipment installed
on roof of office building qualifies for exemption as
equipment used in the furnishing of electricity to
consumers.
Sales Tax (cont.)
DOR Directive 11-2
– Effective 1 July 2011, the sales price of cell phone sold in a bundled transaction
that includes taxable telecommunications services, is the higher of the amount
paid by the customer or the vendor’s wholesale cost of the phone/device
• The vendor can charge the retail customer for the tax based on the sales
price
• If the customer is charged, the tax must be separately stated on the bill to the
customer (Mass DOR Directive 11-2, 27 April 2011)
– Working Draft Directive 11-XX
– Sale of third party coupons (e.g., “Groupon”) is not subject to sales or use tax.
Tax is imposed on the full sales price (including the value of the coupon plus
additional out-of-pocket consideration) when the coupon is used to purchase
taxable meals, tangible personal property or services
FEATURING SPECIAL GUESTS:
Mr. James Wetzler
Director, Multi-State Tax Group
Deloitte Tax LLP
New York, New York
Mr. Richard Genetelli
President
The Genetelli Consulting Group
New York, New York
Mr. David Shipley
Partner
McCarter & English, LLP
Philadelphia, Pennsylvania
NY Sourcing Rule for Electronically
Provided Services
• TSB-A-11(8)C treats electronic trading fees and
clearing fees as Other Business Receipts
sourced based on customer location.
• TSB-A-11(1)C treats debit card processing as
Other Business Receipts, revoking TSB-A95(13)C, which treated credit card processing
as a service sourced to where the processing
activity occurred.
NY
NYC Treatment of Alternative
Investment Managers
• NYC Unincorporated Business Tax treats
“trading for one’s own account” as not being a
business subject to tax. For alternative
investment managers, this serves to exempt
partnerships that own carried interests.
• NYC officials have informed practitioners that it
will insist on attribution of expenses to these
carried interest partnerships.
NY
NYS Treatment of Leveraged Buyouts
• NYS auditors are increasingly challenging
interest deductions associated with leveraged
buyouts.
– Challenges to deductions for interest on
intercompany debt.
– Challenges to debt pushdowns
– Challenges to interest deductions on third-party
indebtedness when incurred to purchase target
company stock.
NY
New York State and City
Combined Reporting Update
•Budget Deficits
•Significant audit activity
–Forced combination
–De-combination
•Prior law
–Ownership
–Unitary business
–Distortion
•Amended Law
–De-emphasize transfer pricing
New York
New York State and City
Amended Combined Reporting Rules*
•Ownership
•Substantial Intercorporate Transactions
–Intercorporate receipts
–Intercorporate expenditures
–Intercorporate asset transfers
•TSB-M-08(2)C
–10-step process to determine companies to be included in a combined group
•Timing Difference Between State and City
–Potential in interim period for different outcomes
* Effective for tax years beginning on or after 1/1/2007 for New York State and on or after
1/1/2009 for New York City
New York
New York State and City
Combined Reporting Controversies
•Unitary Business
–Separate lines of business
–Centralized management
–Holding companies
•Distortion
–How much is needed
•Intercompany Relationships
–Business purpose
–Economic substance
• Computational Issues
–Sale of a subsidiary
• Bausch & Lomb
• TSB-M-08(3)C
New York
New York State and City
Combined Reporting Evaluation
•Tax Impact
– Current year
– Future years
– Prior years open under statute of limitations
•Which Companies are to be Included
– Limited combinations
• Lines of business
• Divisional operations
•Unitary Relationships
•Intercorporate Transactions
•Documentation
•Retroactive Combination
New York
New York State
Withholding Tax Audit Initiative
•Hot Issue
–Bright-line standard – 14 day rule
–Implications of Form IT-2104.1
–Potential penalty for noncompliance
–Interrelationship with personal income tax audits
•Political issue relating to noncompliance for key executives
•Planning Strategies
–Assess prior exposure
–Procedural controls
–Documentation
New York
PA – Important Bulletins
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•
•
Miscellaneous Tax Bulletin 2011-01 changes the Department of Revenue’s
policy regarding the filing of security in Commonwealth Court appeals.
Taxpayers can submit their most recent financial statements in lieu of filing
security with the court.
Miscellaneous Tax Bulletin 2011-02 permits the Board of Appeals to
compromise certain appeals based on doubt as to liability or “the promotion of
effective tax administration”. Different levels of approval are required
depending on the amount of relief granted in compromise.
Sales and Use Tax Bulletin 2011-01 advises remote sellers that certain
activities will be sufficient to establish nexus for sales and use tax purposes.
Remote sellers who register prior to February 1, 2012 will be able to comply
on a prospective basis.
PA, NJ
PA – Glatfelter Pulpwood Company
•
•
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•
In 2004, the taxpayer sold timberland in Delaware for a $56 million gain.
Taxpayer argued the gain was nonbusiness income because it constituted a
partial liquidation.
The court rejected that argument finding that the proceeds were not distributed
to Glatfelter’s parent and that the sale was not a partial liquidation of the
taxpayer’s business because the taxpayer still owned and maintained 14,364
acres of timberland in Delaware.
The Court didn’t rule on whether the 2001 statutory change to the definition of
business income was an amendment or a clarification but addressed that
issue in a footnote.
PA, NJ
PA – Whirlpool Properties
• Court found that throwout rule would be unconstitutional to the extent
that it applies to states that choose not to impose an income tax.
• Court then interpreted throwout rule not to apply to those states that
choose not to impose an income tax.
• Court concluded that throwout rule as interpreted was facially
constitutional.
• Court’s decision is logically inconsistent in regard to P.L. 86-272 and
states that do not assert intangible nexus.
• There may be implications to foreign jurisdiction that do not impose tax
based on tax treaties.
PA, NJ
NJ - BIS
• Appellate Division affirmed Tax Court’s decision that BIS did not
have nexus based on merely owning a limited partnership
interest in a partnership doing business in New Jersey.
• Court’s decision was based on finding that BIS was not unitary
with partnership.
• Court rejected a myriad of arguments from Division.
• Court remanded case to Tax Court to address whether the
corporate partner is entitled to a refund of taxes paid by the
limited partnership despite the issue being raised in the
Division’s reply brief based on “the public interest in the matter.”
PA, NJ
NJ - IBM and Creston
• The Division added back the taxpayers’ extraterritorial income under
IRC § 114 based on the Division’s regulation which provides that
“[i]ncome from sources outside the United States that was not included
in federal taxable income… must be added back to a corporate entity’s
federal taxable income to calculate the entity’s entire net income for
corporation business tax purposes.”
• The Tax Court held that the income was excluded under N.J.S.A.
54:10A-4(k) entire net income is deemed to be equal to the federal
taxable income before the net operating loss and special deductions.
PA, NJ
TAM 6 and TAM 17
• TAM-6 provides that “[t]axpayers performing services and
domiciled outside the State that solicit business within the State
or derive receipts from sources within the State must file a CBT
return and pay applicable taxes to New Jersey.” TAM-6 noted
that the expanded nexus standards were enacted in 2002.
• TAM-17 provides that the Division will apply generally apply
federal 482 standards in making adjustments between related
entities.
PA, NJ
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