21st Annual CFO Roundtable & Tax
Director Workshop
State and Local Income Tax
Update
Las Vegas, Nevada
September 27-29, 2015
Disclaimer
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Ernst & Young refers to the global organization of member firms of Ernst & Young Global Limited,
each of which is a separate legal entity. Ernst & Young LLP is a client-serving member firm of
Ernst & Young Global Limited located in the US.
The Ernst & Young organization is divided into five geographic areas and firms may be
members of the following entities: Ernst & Young Americas LLC, Ernst & Young EMEIA Limited,
Ernst & Young Far East Limited and Ernst & Young Oceania Limited. These entities do not provide
services to clients.
This presentation is ©2015 Ernst & Young LLP. All rights reserved. No part of this document may be
reproduced, transmitted or otherwise distributed in any form or by any means, electronic or
mechanical, including by photocopying, facsimile transmission, recording, rekeying or using any
information storage and retrieval system, without written permission from Ernst & Young LLP.
Any reproduction, transmission or distribution of this form or any of the material herein is prohibited
and is in violation of US and international law. Ernst & Young LLP expressly disclaims any liability in
connection with use of this presentation or its contents by any third party.
Any US tax advice contained herein was not intended or written to be used, and cannot be used for
the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or
applicable state or local tax law provisions.
These slides are for educational purposes only and are not intended, and should not be relied upon,
as accounting advice.
The views expressed by speakers at this event are not necessarily those of Ernst & Young LLP.
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21st Annual CFO Roundtable and Tax Director Workshop
Disclaimer
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Ernst & Young refers to the global organization of member firms of Ernst & Young
Global Limited, each of which is a separate legal entity. Ernst & Young LLP is a clientserving member firm of Ernst & Young Global Limited located in the US.
The Ernst & Young organization is divided into five geographic areas and firms may be
members of the following entities: Ernst & Young Americas LLC, Ernst & Young EMEIA
Limited, Ernst & Young Far East Limited and Ernst & Young Oceania Limited. These
entities do not provide services to clients.
This presentation is ©2014 Ernst & Young LLP. All rights reserved. No part of this
document may be reproduced, transmitted or otherwise distributed in any form or by
any means, electronic or mechanical, including by photocopying, facsimile
transmission, recording, rekeying or using any information storage and retrieval system,
without written permission from Ernst & Young LLP. Any reproduction, transmission or
distribution of this form or any of the material herein is prohibited and is in violation of
US and international law. Ernst & Young LLP expressly disclaims any liability in
connection with use of this presentation or its contents by any third party.
The views expressed by speakers at this event are not necessarily those of Ernst &
Young LLP.
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21st Annual CFO Roundtable and Tax Director Workshop
IRS Circular 230 Disclosure
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Any US tax advice contained herein was not intended
or written to be used, and cannot be used for the
purpose of avoiding penalties that may be imposed
under the Internal Revenue Code or applicable state
or local tax law provisions.
These slides are for educational purposes only and
are not intended, and should not be relied upon, as
accounting advice.
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21st Annual CFO Roundtable and Tax Director Workshop
Agenda
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Legislative Update
Trends in state income tax
State Planning Considerations
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21st Annual CFO Roundtable and Tax Director Workshop
Significant legislative activity
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21st Annual CFO Roundtable and Tax Director Workshop
2015 legislative scorecard
Key: Green – enacted; Red – dead; Purple – vetoed; Black – proposed
Repeal/phase-out tax
• Corporate income/franchise: HI, MS, NY (all manufacturers), TX
• Personal income: GA, MS, TN
• Business surcharges or entity level tax/fee: CT (business entity fee), ME (AMT)
Rates
• Increase: Corporate income: CA, CT (extend corporate surcharge), SD (new franchise tax); Personal income: AK
(new tax), KS, PA, UT; Sales/use: DC, GA, ID, KS, LA, ME, MI (voter approval needed), NE, OH, OR (new tax), PA,
PR, SD (local); Other business tax: NV (new Commerce Tax, increase business license fee), OH
• Decrease: Corporate income: CT, GA, ID, IL, ME, NE, NH, NM, NC, ND, PA, TX; Personal income: AR, GA, ID, IL,
ME, MS, MT, NM, NC, ND, OH, OR, SC; Sales/use: CT, NM, TN , TX
Nexus
• Affiliate/remote retailers: FL, LA, MD, NV, OH, SC, TN, WA
• Economic: MS, NYC, TN, WA
Income tax
• Market sourcing: IN, KY, MO, NM, NYC, NC, TN, VA (study commission)
• Single sales factor: NYC, NM, NC, ND (electable), TN (but did adopt triple weighted sales factor) , VA (certain
data centers)
• Combined reporting: AL, CT, FL, KY, LA, MD, MO, PA; Consolidated returns: MN, MT (both amend current rules)
• Tax havens: AL, CO, CT, FL, KY, ME, MA, MT, NH, OR, PA , VT
• Miscellaneous: Close loopholes: CT, LA, MN; Expand related party add-back: IN, TN
Sales tax
• Tax services: CA, IL, ME, NV, OH, PA, PR, VT
• Expand base/eliminate exemptions: GA, TN (software) ; Exempt cloud computing: VT
• Close loopholes: NY, WA
Property tax
• Property tax relief: ID, IL, ME, MD, NE, NV, ND, PA, TX, WI
Controversy
• Amnesty program: AZ, IN, KS, KY (property taxes), MD, MA, MA (2nd program), MO, NH, NM, OK, PR, SC
• Independent tax court: NM, WA
Other
• Limit tax credits: LA (film, refundable credits); MA (film), WI (historic rehabilitation); NJ, NV, ND, OK (study
effectiveness)
• Create/expand credits: AL, AR, GA, KY, NM, NY, NC, ND, PA, RI, TN, UT, VA
• Adopt a VAT: PR
• Inversions: MO, NJ, VA
• Payroll tax: VT
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21st Annual CFO Roundtable and Tax Director Workshop
Tax amnesty programs
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Tax amnesty programs
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Arizona – 1 September 2015 to 31 October 2015
Indiana – 15 September 2015 to 16 November 2015
Kansas – 1 September 2015 to 15 October 2015
Louisiana – 1 December 2015 to 31 December 2015
Maryland – 1 September 2015 to 30 October 2015
Massachusetts – One month period prior to June 30, 2016
Missouri – 1 September 2015 to 30 November 2015
Oklahoma – 14 September 2015 to 13 November 2015
Puerto Rico – through 30 June 2015
South Carolina – period to be designated by the Department
of Revenue
21st Annual CFO Roundtable and Tax Director Workshop
Alabama
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HB 49 (enacted 11 August 2015)
Establishes a factor-presence nexus standard
Retroactive to tax years beginning after December 31, 2014
A business entity doing business in Alabama will have substantial nexus when
the property, payroll or sales in Alabama exceeds:
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$50,000 of property
$50,000 of payroll
$500,000 of sales
25% of total property, payroll or sales
Public Law 86-272 is still applicable for taxpayers that exceed the nexus
threshold
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21st Annual CFO Roundtable and Tax Director Workshop
Connecticut
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HB 7061 (approved by the legislature 3 June 2015)
Key provisions of the bill include:
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Adopt mandatory unitary combined reporting (includes tax haven language),
effective 1 January 2016
Limit the deduction for NOLs to 50% of Connecticut taxable income, effective 1
January 2015 (exception for certain targeted NOLs)
Reduce to 50.01% (from 70%) the amount of credits that may be used against total
liability under the Corporate Income Tax, effective 1 January 2015
Extend two years (through 2017), the 20% corporate surcharge and impose a 10%
surcharge in 2018 (the 10% surcharge will be phased-out)
Increase the 6.7% marginal individual income tax rate to 6.9% and add a new top
marginal individual income tax rate of 6.99% on the highest income earners
21st Annual CFO Roundtable and Tax Director Workshop
Nevada
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SB 483 (enacted 9 June 2015)
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Establishes a new Commerce Tax, effective 1 July 2015
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First return & payment due August 15, 2016 for the year ended June 30, 2016
Imposed annually on any “business entity” whose Nevada gross revenues for the fiscal
year exceed $4 million
Rate of the Commerce Tax is based on the business category (based on its NAICS code)
in which the business entity is primarily engaged
Rate varies across 26 business categories & ranges from 0.052% (mining) to 0.331%
(railroads)
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Construction = 0.083%
Engineering = depends on NAICS category, but likely 0.181%
Commerce Tax is calculated by making certain adjustments to the business entity’s gross
revenue and then situsing the adjusted revenue base to Nevada
Amends the rate and calculation of the Modified Business Tax (e.g., the excise tax
businesses pay on total wages)
Increases the Business License Fee for corporations to $500 (from $200)
21st Annual CFO Roundtable and Tax Director Workshop
Tennessee
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The "Revenue Modernization Act" (HB 644 and SB 603, enacted 20 May
2015)
Key tax changes:
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Adopt economic and factor presence nexus standards for purposes of the
business, excise and franchise taxes (effective 1 January 2016)
Replace current cost of performance method for sourcing sales of intangible
property and services with a market-based sourcing method (effective 1 July 2016)
Adopt a triple weighted sales factor apportionment formula (effective 1 July 2016)
Make various amendments to the Business Tax
21st Annual CFO Roundtable and Tax Director Workshop
Louisiana
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Amidst a $1.6B budget deficit, the Louisiana Legislature passed several
income tax bills, including provisions to:
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Eliminates NOL carryback, extends the carryforward from 15 to 20 years, and
reduces NOLs claimed by 28%
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The Department of Revenue interprets the 28% limitation to be on taxable income
A potential interpretation exists that the 28% limitation applies to the cumulative NOL
carryforward available
Amends inventory credit, including adopting a definition of “inventory” which
excludes items that might otherwise be considered as inventory, if they are owned
after an initial lease period, after the item has been depreciated, or if the item is
used by the taxpayer and has been owned for > 18 months. Credit is also now only
75% refundable. The nonrefundable portion may be carried forward for 5 years.
Makes R&D credits nonrefundable
Reduce the percentage depletion for oil & gas from 22% to 15.8%
Impact on returns files after 1 July 2015
21st Annual CFO Roundtable and Tax Director Workshop
NYC corporate tax conformity
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S. 4610-A/A. 6721-A (Part D) (enacted 13 April 2015) – Conforms in
substantial part NYC’s corporate tax laws to the 2014 NYS Reform Bill
NYC corporate tax provisions that align directly with the 2014 NYS Reform Bill
and the Final Bill include:
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Required combined reporting
Modifications to the definitions and treatment of investment income and capital
40% safe harbor revocable election for interest expenses
Customer sourcing provisions for receipts sourced to NYC
Computation of pre and post reform NOLs
Elimination of the current subsidiary capital regime
With a few exceptions, the Final Bill and Part D are retroactive to 1 January
2015
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21st Annual CFO Roundtable and Tax Director Workshop
NYC corporate tax conformity (cont.)
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There are several significant deviations from the 2014 NYS Reform Bill
including:
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Maintains a physical presence nexus standard, except for credit card companies
NYC bill requires continued phase-in of a single sales factor apportionment formula
with a full phase in by 2018
8.85% tax rate on business income
Maximum 4.425% rate reduction for qualified NYC manufacturing corporations
$10,000 reduction to the capital base tax and increased cap on capital base tax
from $1 million to $10 million for all taxpayers
Subtraction modification for interest income from qualifying loans
No 40% safe harbor exception for certain dividends
Not applicable to S corporations
21st Annual CFO Roundtable and Tax Director Workshop
District of Columbia
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L20-0155; A20-424; B20-750 (Law date 26 February 2015)
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Reduce the unincorporated and incorporated business franchise tax rate from
9.975% to 9.4% on 1 January 2015, and in subsequent years reduces the rate to
9.2%, 9%, 8.75%, 8.5% or 8.25%, depending on funding availability
Adopt a single sales factor apportionment formula with market-based sourcing for
services
Create new individual income tax brackets and adjust rates and increase the
amount of the personal exemption (new rates/amounts will depend on funding
availability)
Income tax changes generally effective for taxable years beginning after 31
December 2014
21st Annual CFO Roundtable and Tax Director Workshop
Ohio
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Am. Sub. HB 5 (enacted 19 December 2014) – Makes significant changes to
state’s municipal income tax regime, effective beginning 1 January 2016
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Require all municipalities to allow a phased-in, pre-apportioned, five-year carryforward for NOLs
incurred in taxable years beginning on or after 1 January 2017
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NOLs generated prior to 2017 will continue to be carried forward as allowed under prior law
Require municipalities to impose net profits tax on pass-through entities, other than S
corporations, at the entity level
Authorize corporate taxpayers to elect to file a municipal consolidated return by reference to its
federal consolidated group
Allow the use of an alternative apportionment method to fairly represent the taxpayer's business
activity in the municipality
Allow a resident individual to offset gains and losses generated by different pass-through
entities during the year that such gains or losses were generated
Increase the safe harbor that exempts nonresident compensation from income tax and
withholding from 12 to 20 days (does not apply to professional athletes, entertainers, other
public figures)
21st Annual CFO Roundtable and Tax Director Workshop
Texas
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HB 32 (enacted 15 June 2015)
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Reduction in tax rate for entities not primarily engaged in retail or
wholesale trade from 1.0% to 0.75%
Reduction in tax rate for entities primarily engaged in retail or
wholesale trade from 0.5% to 0.375%
EZ computation threshold increased to $20 million of total revenue
(from $10 million)
EZ tax rate reduced from 0.575% to 0.331%
Permanent rate reductions (i.e., not dependent on state revenues)
Effective for Report Year 2016 (2015 Accounting Year)
21st Annual CFO Roundtable and Tax Director Workshop
US Supreme Court: Comptroller v. Wynne
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Wynne (U.S. Sup. Ct 18 May 2015) - US Supreme Court held that Maryland’s personal
income tax scheme, which provides a credit for taxes paid to other states for the state
portion of the income tax but not for the county portion, violates the dormant Commerce
Clause
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Refunds … when can Maryland taxpayers expect them?
► Maryland HB 72 (became law without governor’s signature, 29
May 2015)
► Maryland Attorney General certified Court’s ruling triggers refunds
► Comptroller will process refund claims in the order in which they
were received
What about other state schemes?
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IL, KS, MO, NYC, NC, PA, Ohio cities – no credit for city taxes
States without full credit for taxes paid to localities in other states (e.g.,
California)?
Credits for taxes paid to foreign countries? Other tax types?
21st Annual CFO Roundtable and Tax Director Workshop
Trends in State Income Taxation
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21st Annual CFO Roundtable and Tax Director Workshop
Trends in State Income Taxation
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Reaching beyond the water’s edge
Multistate Tax Commission issues
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Transfer pricing
MTC apportionment election
UDITPA recommendations
Combined reporting
Emphasis on the sales factor
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21st Annual CFO Roundtable and Tax Director Workshop
Reaching beyond the waters’-edge
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21st Annual CFO Roundtable and Tax Director Workshop
The OECD and base erosion/profit shifting
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The OECD is currently undertaking a multiyear project to address what the
industrialized nations refer to as Base Erosion and Profit Shifting (BEPS)
Previous state responses to BEPS
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Unitary combined reporting
Commissioner’s discretionary authority (state-IRC §482 authority)
Forced combined reporting
Alternative apportionment
Related party expense add back requirements
Economic nexus
Business purpose and economic substance
States considering tax haven language, worldwide consolidated filing
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Tax haven language in Montana, Oregon, Connecticut, D.C., Alaska, West Virginia,
Maine, Rhode Island
21st Annual CFO Roundtable and Tax Director Workshop
Multistate Tax Commission Issues
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21st Annual CFO Roundtable and Tax Director Workshop
2
Multistate Tax Commission (MTC) initiative
on transfer pricing
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Arm’s-Length Adjustment Service (ALAS) – Transfer pricing for the states
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7 May 2015 – MTC Executive Committee votes to move
forward despite only six states committing to program (AL,
IA, KY, NC, NJ, PA)
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Initial staffing – six full-time equivalent employees
Audits could begin in July 2015
MTC Transfer Pricing Training Programs for state auditors
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MTC hired Dr. Ednaldo Silva, one of primary drafters of the IRC
§482 regulations
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Participating states include:
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ALAS advisory council states: AL, KY, FL, GA, IA, NC and NJ
New state attendees: CT, PA, LA
DC and HI participate as well to some degree
21st Annual CFO Roundtable and Tax Director Workshop
2
Compact election: Michigan
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IBM (Mich. Sup. Ct. 14 July 2014) – Taxpayer allowed to
make an election to use the Compact’s equally weighted
three-factor apportionment formula to determine tax
liability under the former Michigan Business Tax (MBT)
instead of using the MBT’s single sales factor formula
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IBM ruling only covers years 2008 – 2010
Michigan Supreme Court denied state’s motion for rehearing
11 September 2014, Michigan enacted legislation to repeal the
Multistate Tax Compact retroactive to 2008
Court of Claims has upheld the retroactive repeal and ruled that it
applies to IBM
Court of Appeals heard arguments on September 2, 2015 on
behalf of 50 taxpayers
21st Annual CFO Roundtable and Tax Director Workshop
Compact election: Other states
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Compact election challenges
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Gillette – California Supreme Court to hear oral arguments;
October 6, 2015
Kimberly Clark – Summary judgment in favor of the Commissioner,
awaiting decision on motion for certiorari to Minnesota Supreme
Court
Health Net – Oregon Tax Court heard arguments on 22 July 2014
Graphic Packaging – Travis County District Court held that election
could not be made; Texas Court of Appeals determined that the
Texas franchise tax is not an income tax and does not qualify for
the 3 factor MTC rules (28 July 2015)
Scorecard of MTC Compact repeal legislation
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Enacted in California, Colorado, District of Columbia, Michigan,
Minnesota, North Dakota (2016), Oregon, South Dakota, Utah
21st Annual CFO Roundtable and Tax Director Workshop
MTC Executive Committee unanimously
adopts UDITPA* reform recommendations
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First reform in 50 years
Highlights
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Double-weighted sales factor
Destination sourcing for services and intangible property (instead of costs of
performance)
Revised §18 Alternative Apportionment
Long way from implementation – state legislative approvals required
* Uniform Division of Income for Tax Purposes Act
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21st Annual CFO Roundtable and Tax Director Workshop
Combined reporting
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21st Annual CFO Roundtable and Tax Director Workshop
Expansion of combined reporting
Key
As of 11 May
2015
Combined reporting/consolidated return required prior to 2004
* For purposes of the CAT
Combined reporting/consolidated return adopted for 2004 or later
** Limited to big box
retailers
Combined reporting legislation proposed in 2015
Separate return state
No income tax
WA
MT
ME
ND
NYCity*
OR
ID
WI
SD
MI
WY
NV
CA
UT
IL
CO
KS
OK
NM**
TX
IN
MO
P
A
MD
OH*
WV
VA
KY
NC
TN
AR
SC
MS
AK
NY*
IA
NE
AZ
AL
GA
LA
HI
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VT
MN
21st Annual CFO Roundtable and Tax Director Workshop
F
L
NH
CT
NJ
DE
DC
MA
RI
201
5
Emphasis on the sales factor
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21st Annual CFO Roundtable and Tax Director Workshop
2000: States with a single sales factor*
Key
3 – factor formula
Single sales factor formula
WA
ME
No income tax
ND
MT
OR
VT
MN
ID
NH
WI
SD
MA
NY
MI
CT
WY
NV
PA
IA
NE
IL
UT
CA
OH
IN
KS
MO
VA
DC
KY
NC
TN
AZ
OK
NM
SC
AR
MS
AK
TX
AL
GA
LA
HI
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RI
DE
WV
CO
NJ
MD
FL
21st Annual CFO Roundtable and Tax Director Workshop
*Some additional states
were in the process of
phasing in to a single
sales factor apportionment
formula
2015: States with a single sales factor
As of May 2015
3-factor formula: equal weighting
3-factor formula: unequal weighting
WA
Single sales factor formula
MT
OR
VT
MN
ID**
NH
WI
SD
PA
IL
UT**
CA**
CT
IA
NE
OH
IN
MO
VA*
OK**
NM**
TX
NJ
DE
DE**
DC
(2015)
SC
AL
GA**
LA**
HI
FL
*Single sales factor is either electable or being phased-in
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RI
(2015)
NC**
AR
MS**
AK
RI
KY
TN
AZ*
NJ
MD
WV
CO
KS
MA
NY
MI
WY
NV
ME
No income tax
ND
**Different apportionment rules apply to certain industries
21st Annual CFO Roundtable and Tax Director Workshop
2000: Sourcing of multistate service
revenue
Source to state where greater portion of income producing activity
performed (“all or nothing”)
Source to state to the extent services performed in state (“to the extent
of” or “direct”)
Source to state where benefit of service received (“benefit” or “market”)
WA
No income tax
ME
ND
MT
OR
VT
MN
NH
ID
WI
SD
MI
NY
WY
NV
PA
IA
NE
NJ
IL
UT
CA
OH
IN
MD
WV
CO
KS
MO
OK
SC
AR
MS
AK
TX
AL
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GA
LA
HI
21st Annual CFO Roundtable and Tax Director Workshop
DE
DC
NC
NM
RI
VA
KY
TN
AZ
MA
CT
FL
2015: Sourcing of multistate service
revenue
As of May 2015
Source to state where greater portion of income producing activity
performed (“all or nothing”)
Source to state to the extent services performed in state (“to the
extent of” or “direct” )
Source to state where benefit of service received (“benefit” or
“market”)
WA
ME
No income tax
ND
MT
OR
VT
MN
NH
ID
WI
SD
NY
2015
MI
WY
NV
CA
PA
201
NJ
4 MD
IA
NE
2014
IL
UT
OH
IN
WV
CO
KS
MO
VA
KY
NC
TN
AZ
2014
OK
NM
SC
AR
MS
AK
TX
AL
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GA
LA
HI
21st Annual CFO Roundtable and Tax Director Workshop
MA
CT
FL
RI
2015
DE
DC
2015
Increase the sales factor and move to
market-based sourcing
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Sales factor changes
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Single sales factor (SSF) adopted: California (2013), District of Columbia (2015),
Michigan, New York (expanded to FSI, 2015), Pennsylvania (2013), Rhode Island
(2015)
SSF being phased-in: New York City, New Jersey, City of Philadelphia ,Utah
SSF (elective): Arizona, California (2011-2012), Missouri (2013, as clarified in 2015)
New Mexico, North Dakota (2016)
SSF-specific industry or as an incentive: Florida, Louisiana, Virginia
Increased-weighted sales factor: Alabama, District of Columbia (2011-2014),
Tennessee (2016)
Market sourcing adopted
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Alabama, Arizona (a phased-in election for multistate service providers), California
(tied to single sales factor), District of Columbia (2015), Massachusetts, Missouri
(for optional SSF, 2015) Nebraska, New York (2015), Pennsylvania, Rhode Island
(2015), South Dakota, Tennessee (2016)
21st Annual CFO Roundtable and Tax Director Workshop
Market-based sourcing rules
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Massachusetts
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Nebraska
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839 CMR 63.38.1 (adopted 2 January 2015) – DOR adopted final market-based
sourcing regulations for sales factor and changes the apportionment regulations for
certain special industries
Market-based Sourcing Guidance (29 December 2014) – DOR issued guidance on
market-based sourcing provisions that, starting in 2014, replace the COP rule to
apportion income from sales other than sales of tangible personal property
Pennsylvania
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Notice 2014-01 (12 December 2014) – Provides guidance on sourcing revenues
from the sales of services for sales factor apportionment purposes under the new
market-based sourcing provisions that apply starting in 2014
21st Annual CFO Roundtable and Tax Director Workshop
COP sourcing in South Carolina
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South Carolina
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Dish DBS Corporation (S.C. Admin. Law Ct. 10 February 2015) – Sales factor
statute uses “income-producing activity” in the state to source service revenue
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ALJ rejects summary motions of both taxpayer (claiming COP) and
DOR (claiming market-sourcing) since genuine issue of material fact
exists as to which method applies under the statute
DIRECTV, Inc. (S.C. Admin. Law Ct. 12 May 2015) – 100% of the
taxpayer’s subscription receipts from South Carolina customers
should be included in the numerator of the gross receipts ratio
because all of the taxpayer’s income-producing activities related to
South Carolina customers occurred entirely within the state
21st Annual CFO Roundtable and Tax Director Workshop
Throwback and throwout rules
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Indiana
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New Jersey
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SB 441 (enacted 6 May 2015) – Eliminates the throwback rule, effective for tax
years beginning on and after 1 January 2016
Toyota Motor Credit Corp. (N.J. Tax Ct. 1 August 2014) – Division of Taxation erred
in applying the throw-out rule to company’s receipts sourced to Nevada, South
Dakota and Wyoming, because for the years at issue the company had sufficient
presence in these states
Rhode Island
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HB 7133 Sub A (enacted 16 June 2014) – Effective 1 January 2014, a throwback
rule applies to sales of tangible personal property
21st Annual CFO Roundtable and Tax Director Workshop
Cost of performance
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Cost of performance (COP) is a “winner take all rule”
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From the beginning, no one was satisfied with the §17 COP sourcing rule for nonTPP sales
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Does not reflect the contribution of the market states
COP sources receipts to production states
Subjectivity on allocating costs among states
COP reflected practical realities of the 1950’s when adopted
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Economy was more mercantile and manufacturing oriented
Major service industries excluded from UDITPA
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Financial organizations (banks, insurance companies)
Public utilities
21st Annual CFO Roundtable and Tax Director Workshop
What’s happened in 50 years?
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Shift to a more heavily weighted or single sales factor
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►
COP tends to source sales towards production states
►
►
Why are states moving to a more heavily weighted or single sales factor?
Does the more heavily weighted or single sales factor help or hurt?
How do states implement? Is it required for all taxpayers, certain industries, or is it
elective?
Counter-productive to the original intention of moving to the heavily weighted sales
factors in the first place
Therefore, states have taken their own independent actions and changed
their sales factor sourcing rules, shifting from a COP approach to a marketbased sourcing regime for services and intangible property
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21st Annual CFO Roundtable and Tax Director Workshop
MTC revisions to UDITPA Section 17
(a)
Sales, other than sales described in §16 [TPP], are in this State if the taxpayer’s market for the sales
is in this state. The taxpayer’s market for sales is in this state:
….
(3) in the case of sale of a service, if and to the extent the service is delivered to a location in this
state; and
(4) in the case of intangible property,
(i)
(ii)
that is rented, leased, or licensed, if and to the extent the property is used in this state, provided that intangible
property utilized in marketing a good or service to a consumer is “used in this state” if that good or service is
purchased by a consumer in this state; and
that is sold, if and to the extent the property is used in this state, provided that:
(A) a contract right, government license, or similar intangible property that authorizes the
holder to conduct a business activity in a specific geographic area is “used in this state”
if the geographic area includes all or part of this state;
(B) receipts from intangible property sales that are contingent on the productivity, use, or
disposition of the intangible property shall be treated as receipts from the rental, lease
or licensing of such intangible property under subsection (a)(4)(i); and
(C) all other receipts from a sale of intangible property shall be excluded from the
numerator and denominator of the sales factor.
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21st Annual CFO Roundtable and Tax Director Workshop
MTC revisions to UDITPA Section 17 (cont.)
(b) If the state or states of assignment under subsection (a) cannot be
determined, the state or states of assignment shall be reasonably
approximated.
(c) If the taxpayer is not taxable in a state to which a sale is assigned under
subsection (a) or (b), or if the state of assignment cannot be determined
under subsection (a) or reasonably approximated under subsection (b), such
sale shall be excluded from the denominator of the sales factor.
(d) [The tax administrator may prescribe regulations as necessary or appropriate
to carry out the purposes of this section.]
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21st Annual CFO Roundtable and Tax Director Workshop
Trading one set of problems for another
Cost of performance
►
►
What are “income producing
activities”
► What “direct costs” should be
counted?
► Match costs to revenue?
► Third party costs included?
Where (i.e., in which state) were the
direct costs incurred?
Page 43
Market based sourcing
►
►
What does market mean?
► Where customer located?
► Where benefit of the service is
received?
► Where intangible property is
used?
Which receipts are measured?
► Treasury receipts?
21st Annual CFO Roundtable and Tax Director Workshop
Problems with market-based sourcing
►
Some states adopt different market-based sourcing rules from other states
and also from the MTC’s proposed amendments to Article IV of the UDITPA
►
Therefore, sales from non-TPP by the same taxpayer may be sourced
differently among states using market-based sourcing
►
Page 44
Adds new layers of complexity and creates the potential for over- or undertaxation
of multistate taxpayers.
21st Annual CFO Roundtable and Tax Director Workshop
Approaches to market-based sourcing
►
Benefits – received approach
►
►
Services – delivered approach
►
►
Assigns receipts from services to the state where the benefit of the services was
received
Source receipts from services to the state in which the service was delivered or
received
Receipts – derived approach
►
Page 45
Assigns receipts from services to a state if the service provider derived receipts
from the state’s market
21st Annual CFO Roundtable and Tax Director Workshop
States adopting market-based sourcing
BenefitsReceived States
ServicesReceipts-Derived
Delivered States
States
Arizona
Alabama
Georgia
California
Illinois
Maryland
Iowa
Maine
Nebraska
Michigan
Massachusetts
Oklahoma
New York
Minnesota
Rhode Island
Pennsylvania
Utah
Wisconsin
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21st Annual CFO Roundtable and Tax Director Workshop
State tax planning considerations
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21st Annual CFO Roundtable and Tax Director Workshop
Common business reasons for restructuring
►
►
►
►
►
►
►
►
►
►
►
Acquisition or divestiture
Entity simplification initiative
Expanded domestic footprint (e.g., entering new markets)
Intellectual property management (e.g., centralizing or offshoring)
Global structuring or supply chain initiatives
Supply chain realignment
Centralization of functions
Debt alignment
Significant passive income
Mismatch of income activity and loss activity
Replacement or enhancement of dated structures
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21st Annual CFO Roundtable and Tax Director Workshop
Business purpose
►
►
There must be a substantial business purpose, independent of tax benefit for
all restructuring engagements
Business purpose/Economic substance (dual inquiry)
►
►
►
Page 49
Does the transaction have a purpose, substance, or utility apart from the
anticipated tax consequences?
Are there objective indicators of the practical economic effects of a transaction,
independent of tax benefits?
Taxpayers must supply the business reasons supporting the restructuring, and they
must be reasonable.
21st Annual CFO Roundtable and Tax Director Workshop
Sample Approach to a Planning
Whiteboarding Session
►
Objectives
►
►
►
Identify objectives of planning
Discussion
►
►
Current State
►
►
►
►
►
Filing methodologies
Understand current tax footprint
Nexus
Filing methods
Apportionment
Attributes
►
Apportionment & sourcing
►
►
►
►
►
►
►
$$
►
►
►
Page 50
OpCo
2
OpCo
3
Credits
NOLs
Nexus
Structural changes
►
OpCo
1
Management charges
Debt charges
Domestic IP
State tax attributes
►
P
Hedging transactions (gross v. net,
sourcing)
Least amount
Destination sourcing
of restructuring
Sourcing on gains
Intercompany charges
►
Ban
k
Unitary, nexus combined, separate
►
Unitary/Separate company split
Supply Chain structure
21st Annual CFO Roundtable and Tax Director Workshop
Most amount
of restructuring
Acquisition/Disposition state tax issues
►
►
►
►
►
►
►
►
►
►
►
►
►
►
►
Debt push down
Transaction structuring – planning for tax
efficiency and exit strategies
Entity simplification/rationalization
Future Use of NOLs (§381, §382)
Consolidated filing elections
Instant unity considerations
CA and WI §338(g) elections
Apportionment modeling for provision
purposes
Integration modeling
Process updates
Transaction tax analysis and compliance
assistance
Refunds (lookback reviews; income and sales
tax)
Voluntary Disclosure Agreements (VDAs)
Nexus studies (income/franchise, sales and
use)
Taxability matrices
Page 51
►
►
►
►
►
►
►
►
►
►
►
Bankruptcy and other Cancellation of
indebtedness income (COD) considerations
(§§108 and 1017 conformity for state
purposes)
Private letter rulings for filing positions
Structures for procurement company, leasing
company, trade-in company, distribution
company, internet sales company
Cost segregation (real property vs. TPP)
Sales tax and employment tax registrations
Obsolescence planning (property tax –
reduction to tax base based on planned vs.
actual)
Property tax reassessments
Experience rating transfers
Transferability of negotiated incentives
Process review – Prospective ACA compliance
ACQUISITIONS/DISPOSITIONS ARE A
PERFECT TIME TO ADDRESS VARIOUS
STATE TAX PLANNING STRATEGIES (i.e.,
BUSINESS PURPOSE)!
21st Annual CFO Roundtable and Tax Director Workshop
Example Structures
►
Domestic supply chain
►
►
►
Services company
►
►
►
►
Shared services for multiple operating
companies
Identifies value added functions
►
►
►
►
►
►
►
Determination of debt holders and debt service
requirements
Structural and non-structural approaches
Foreign/Domestic Alignment
►
Common SALT issues related to
planning:
►
Debt structure
►
►
Functional separation of activities, particularly
related to flow of goods
Matching of income to states of operation
►
►
►
►
Nexus containment
Sourcing, throwback and right to apportionment
Sourcing of service revenue
Classification of revenue as service or intangible
Transfer pricing
Subpart F income deductions
CFC and 80/20 company exclusions from
combined group
State nexus for foreign companies
State tax addback rules and exceptions
Choice of entity
Centralized services for foreign and domestic
operations
Receivables, procurement, financing, etc.
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21st Annual CFO Roundtable and Tax Director Workshop
Other income/franchise tax structuring hot
topics
►
►
►
►
►
►
►
►
►
Intercompany debt
A/R factoring companies
General 80/20 company
Joyce/Finnigan
Interest expense
LLC conversions
Installment sale
Franchise tax– debt push down
State specific
►
Page 53
Texas passive entities, Louisiana LPs/LLCs, New Jersey nexus, etc.
21st Annual CFO Roundtable and Tax Director Workshop
Q&A
Page 54
21st Annual CFO Roundtable and Tax Director Workshop
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