21st Annual CFO Roundtable & Tax Director Workshop State and Local Income Tax Update Las Vegas, Nevada September 27-29, 2015 Disclaimer ► ► ► ► ► ► 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. Page 1 21st Annual CFO Roundtable and Tax Director Workshop Disclaimer ► ► ► ► 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. Page 2 21st Annual CFO Roundtable and Tax Director Workshop IRS Circular 230 Disclosure ► ► 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. Page 3 21st Annual CFO Roundtable and Tax Director Workshop Agenda ► ► ► Legislative Update Trends in state income tax State Planning Considerations Page 4 21st Annual CFO Roundtable and Tax Director Workshop Significant legislative activity Page 5 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 Page 6 21st Annual CFO Roundtable and Tax Director Workshop Tax amnesty programs ► Tax amnesty programs ► ► ► ► ► ► ► ► ► ► Page 7 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 ► ► ► ► 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: ► ► ► ► ► $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 Page 8 21st Annual CFO Roundtable and Tax Director Workshop Connecticut ► ► HB 7061 (approved by the legislature 3 June 2015) Key provisions of the bill include: ► ► ► ► ► Page 9 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 ► SB 483 (enacted 9 June 2015) ► Establishes a new Commerce Tax, effective 1 July 2015 ► ► ► ► 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) ► ► ► ► ► Page 10 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 ► ► The "Revenue Modernization Act" (HB 644 and SB 603, enacted 20 May 2015) Key tax changes: ► ► ► ► Page 11 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 ► Amidst a $1.6B budget deficit, the Louisiana Legislature passed several income tax bills, including provisions to: ► Eliminates NOL carryback, extends the carryforward from 15 to 20 years, and reduces NOLs claimed by 28% ► ► ► ► ► ► Page 12 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 ► ► 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: ► ► ► ► ► ► ► 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 Page 13 21st Annual CFO Roundtable and Tax Director Workshop NYC corporate tax conformity (cont.) ► There are several significant deviations from the 2014 NYS Reform Bill including: ► ► ► ► ► ► ► ► Page 14 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 ► L20-0155; A20-424; B20-750 (Law date 26 February 2015) ► ► ► ► Page 15 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 ► Am. Sub. HB 5 (enacted 19 December 2014) – Makes significant changes to state’s municipal income tax regime, effective beginning 1 January 2016 ► 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 ► ► ► ► ► ► Page 16 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 ► HB 32 (enacted 15 June 2015) ► ► ► ► ► ► Page 17 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 ► 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 ► 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? ► ► ► ► Page 18 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 Page 19 21st Annual CFO Roundtable and Tax Director Workshop Trends in State Income Taxation ► ► Reaching beyond the water’s edge Multistate Tax Commission issues ► ► ► ► ► Transfer pricing MTC apportionment election UDITPA recommendations Combined reporting Emphasis on the sales factor Page 20 21st Annual CFO Roundtable and Tax Director Workshop Reaching beyond the waters’-edge Page 21 21st Annual CFO Roundtable and Tax Director Workshop The OECD and base erosion/profit shifting ► ► 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 ► ► ► ► ► ► ► ► 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 ► Page 22 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 Page 23 21st Annual CFO Roundtable and Tax Director Workshop 2 Multistate Tax Commission (MTC) initiative on transfer pricing ► Arm’s-Length Adjustment Service (ALAS) – Transfer pricing for the states ► 7 May 2015 – MTC Executive Committee votes to move forward despite only six states committing to program (AL, IA, KY, NC, NJ, PA) ► ► ► Initial staffing – six full-time equivalent employees Audits could begin in July 2015 MTC Transfer Pricing Training Programs for state auditors ► MTC hired Dr. Ednaldo Silva, one of primary drafters of the IRC §482 regulations ► Participating states include: ► ► ► Page 24 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 ► 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 ► ► ► ► ► Page 25 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 ► Compact election challenges ► ► ► ► ► 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 ► Page 26 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 ► ► First reform in 50 years Highlights ► ► ► ► 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 Page 27 21st Annual CFO Roundtable and Tax Director Workshop Combined reporting Page 28 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 Page 29 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 Page 30 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 Page 31 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 Page 32 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 Page 33 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 Page 34 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 ► Sales factor changes ► ► ► ► ► ► 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 ► Page 35 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 ► Massachusetts ► ► Nebraska ► ► 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 ► Page 36 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 ► South Carolina ► 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 ► ► Page 37 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 ► Indiana ► ► New Jersey ► ► 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 ► Page 38 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 ► Cost of performance (COP) is a “winner take all rule” ► From the beginning, no one was satisfied with the §17 COP sourcing rule for nonTPP sales ► ► ► ► 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 ► ► Economy was more mercantile and manufacturing oriented Major service industries excluded from UDITPA ► ► Page 39 Financial organizations (banks, insurance companies) Public utilities 21st Annual CFO Roundtable and Tax Director Workshop What’s happened in 50 years? ► Shift to a more heavily weighted or single sales factor ► ► ► ► 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 Page 40 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. Page 41 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.] Page 42 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 Page 46 21st Annual CFO Roundtable and Tax Director Workshop State tax planning considerations Page 47 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 Page 48 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. Page 52 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 EY | Assurance | Tax | Transactions | Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. 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