What’s
Happening
Friday
November 30, 2012
Hosted by
Ginny Buckner Kissling
Savannah
Guthrie
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 Overview
Dale Busacker, Minnesota
Pat Van Tiflin, Michigan
Scott Reiber, California
Jack Harper, North Carolina
Mark Eidman, Texas
Fred Nicely, Ohio
Program Overview
Jason Wyman, Illinois
Jonathan Block, Maine / New Hampshire
Jason Zorfas, Massachusetts
Dick Genetelli, New York
David Shipley, Pennsylvania / New Jersey
NEWS
BREAK
Presented by
Jack Trachtenberg
Sutherland Asbill &
Brennan LLP
Todd Lard
&
Council On State
Taxation
FEATURING SPECIAL GUESTS:
Mr. Mark Eidman
Partner
Ryan Law, LLP
Austin, Texas
Mr. Fred Nicely
Tax Counsel
Council On State Taxation
Washington, DC
FEATURING SPECIAL GUESTS:
Mr. Jason Zorfas
Mr. Richard Genetelli
Executive Director, State and
President
Local Tax
The Genetelli Consulting Group
Ernst & Young LLP
New York, New York
Boston, Massachusetts
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
2012 Legislative update
• Both the House and the Senate were controlled by Republicans and
the Governor is a Democrat.
• The two major tax bills, HF 2337 and HF 247 were vetoed.
• These bills had contained an increase in the research credit
percentage and an upfront sales tax exemption for the purchase of
capital equipment.
Express Scripts – Tax Court decision
•
Issue 1 – The taxpayer was not in a unitary business relationship
with its one-third owned Minnesota joint venture partnership
because of the lack of a flow of value or sufficient control.
•
Issue 2 – The law does not require the apportionment of the IRC
Section 382 limit on the use of NOL carryovers.
Corporate income tax nexus
1. Skagen Designs – The Tax Court held that the activities of merchandisers exceeded the
solicitation of orders when they provided training sessions to retail store employees and when
they prepared store reports, photos, and floor maps. These merchandisers were not
responsible for selling any Skagen products.
2. Cambell Soup – Pending before the Tax Court. Campbell Sales asserts that it does not have
income tax nexus with Minnesota. The DOR asserts that Sales' employees exceed the
protection of PL 86-272 when they analyze sales data, conduct post-event analysis to
determine return-on-investment on promotional events, and when they conduct team building
and development plan activities.
The DOR also asserts that Sales has "flash title" nexus to inventory in Minnesota because title
to the property is briefly transferred to Sales before the property is sold to the customer.
Residency litigation
• Tax Court decided that these individuals were still domiciled in Minnesota
•
1.
Larson. Taxpayer maintained that he moved to Nevada. During the years 2002 – 2006
he spent between 126-169 days in Minnesota while spending between 35-74 days in
Nevada.
2.
Mauer. This taxpayer is an NBA referee who maintained that he moved to Florida.
However, the taxpayer spent significantly more days in Minnesota than he spent in
Florida, his travel to and from NBA games was from Minnesota, and he spent his summer
vacation months in Minnesota.
Pending before the Tax Court
3.
Zavadil. These taxpayers maintain that they moved to Nevada. However, they spent
more time in Minnesota than they spent in Nevada.
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.
Potential Gillette issue
• In 1983, the Legislature adopted the MTC Compact. Minnesota then
allowed business taxpayers to elect to use equally weighted three factor
apportionment or to apportion income based on 70% sales, 15%
property, and 15% payroll. Minnesota also used cost of performance to
determine the sales factor for services.
• The 1987 Legislature repealed Articles III and IV of the MTC Compact
and repealed the election to use the equally weighted three factor
apportionment formula
• The 1988 Legislature adopted market based sourcing for the sales factor
for services.
Michigan Developments
Mr. Patrick Van Tiflin
Partner
Honigman, Miller, Schwartz, and Cohn LLP
Lansing, Michigan
MTC ELECTION
• MBT – IBM 11-20-12
• SBT – Is it an Income Tax?
Michigan Corporate Income Tax
• 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
SBT Apportionment
•
•
•
•
•
•
Cost of Performance
TPP vs SVC – Mixed Transactions
Sales Representation
Population Factor
Destination
Unitary Business Principle
Michigan Corporate Income Tax
• 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.
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
• Many SBT Tax Years Open
• MBT Audits Only Recently Begun
• MBT Tax Years Open as Late as 12/31/2016
MBT
CIT
California Developments
Mr. Scott Reiber
Morrison & Foerster LLP
San Francisco, California
The Gillette Company v. FTB
• Several taxpayers filed suit arguing that, because California was a
signatory to the Multistate Tax Compact, taxpayers were permitted to
elect to use the Compact’s three-factor apportionment formula, as
opposed to California’s formula with a double-weighted sales factor
• The trial court sustained the FTB’s demurrer on the basis that
California’s double-weighted formula was intended to take away the
taxpayers’ option to use the standard three-factor formula
• California law stated that the double weighted formula applied “notwithstanding
Section 38006 [the Compact]”
The Gillette Company v. FTB
• Key Findings of Court of Appeal
• The Compact is a valid multistate compact that is binding on
member states
• The Compact permits taxpayers to elect to apportion and allocate
income in accordance with Article IV of the Compact
• California may only withdraw from the Compact by enacting a
statute repealing the Compact, and the repeal must be prospective
in nature
• The Compact may not be repealed piecemeal
The Gillette Company v. FTB
• Petition to California Supreme Court
• The Franchise Tax Board recently filed a petition with the California
Supreme Court
• It again alleged that the “notwithstanding” language enacted in 1993
repealed the election under the Multistate Tax Compact
• The FTB also argued that doing so did not violate the Contracts Clause or the
Reenactment Rule
• The FTB noted that the Court of Appeal’s decision would cost the
state over $750MM
• If applied to other provisions in the Compact, it could be significantly more.
• The FTB also noted that other states are watching
The Gillette Company v. FTB
• Senate Bill 1015
• On June 27, 2012, the Legislature passed SB 1015
prospectively repealing the Compact
• The Legislature declared that any election to use the
Compact’s three-factor formula had to be made on an original
return under the “doctrine of elections”
• This would preclude taxpayers from filing amended returns for
past years to elect to rely on the Compact
• Is SB 1015 valid?
The Gillette Company v. FTB
• Proposition 39
• The California voters recently passed Proposition 39, which
imposes mandatory single-sales factor apportionment in
California beginning in 2013
• This was described to voters as closing a tax loophole
• When using the single-sales factor apportionment formula, taxpayers
must also use market-based sourcing
• Thus, for tax years 2011 and 2012 California has an elective
single-sales factor formula, and for tax years 2013 and
beyond California has a mandatory single-sales factor formula
The Gillette Company v. FTB
• Potential Impact if the Court of Appeal Decision Stands
and SB 1015 Is Invalid
• For prior years, taxpayers can file amended returns relying on the three-factor
formula in the Compact
• These claims may be denied if the election needed to be made on an original
return
• For 2012, taxpayers may use either: (1) a formula with a double-weighted sales
factor; (2) a single-sales factor formula; or (3) the standard three-factor formula
• For 2013 the double-weighted sales factor option has been removed
• However, the FTB has issued guidance indicating that it plans to apply the 20%
Large Corporate Understatement Penalty if the taxpayer’s position is later found to
be incorrect
Dicon Fiberoptics v. FTB
•
•
•
California law permits taxpayers to take a credit against
franchise taxes with respect to a portion of wages paid to
certain disadvantaged workers (“qualified employees”)
employed in designated enterprise zones
Taxpayers were generally required to provide information
to a local vouchering agency, which would then certify that
employees were “qualified employees”
The vouchers stated that only the first page, and none of
the underlying information provided to the agency, was to
be returned to the taxpayer
Dicon Fiberoptics v. FTB
•
•
In Dicon, the FTB later audited the taxpayer, and, despite
receiving copies of the vouchers, required the taxpayer to
provide additional information proving the employees were
“qualified employees”
The Court of Appeal held that the vouchers themselves
were prima facie evidence that the employees were
“qualified employees”
•
Therefore, the burden was on the FTB to prove that the employees
were erroneously vouchered.
Dicon Fiberoptics v. FTB
• The California Supreme Court reversed, finding:
• The vouchers were not prima facie evidence
• The FTB could require the taxpayer to prove that the worker was a
“qualified employee,” even though the taxpayer had received a
certification that this was the case several years earlier
• This was based on the FTB’s general authority to audit returns and obtain
information from taxpayers and a statute indicating that the FTB was not
bound by the decision of another agency
• The California Supreme Court believed that the vouchers
were just another requirement to obtain the credit, and had
no other value to the taxpayer.
General Mills v. FTB
• California Court of Appeal originally held that hedging
receipts had to be included as “sales” in the standard
apportionment formula
• On remand, the trial court agreed with the FTB that:
• Hedging was qualitatively different from General Mill’s
principal business
• Including the hedging receipts resulted in substantial
quantitative distortion
• The Court of Appeal upheld the decision of the trial court,
albeit on grounds not raised by the FTB or the trial court
General Mills v. FTB
• Under the qualitative analysis, the Court of Appeal declined
to follow the legal analysis applied in the treasury function
cases
• Rather, it concluded that alternative apportionment was equally
applicable where the taxpayer did not have a direct profit motive
for the sales at issue
• Under the quantitative analysis, the Court of Appeal relied
primarily on comparisons of profit margins, concluding that
there was sufficient quantitative distortion in General Mills’
case
Potential Impact of General Mills
• The Court of Appeal’s newly-minted paradigm appears to
permit the use of an alternative formula anytime the
taxpayer does not have a profit motive for a particular sale
•
•
Such sales would violate the qualitative test under the Court of Appeal’s decision
Such sales would generate no profit margins, and would therefore also violate the
quantitative test under the Court of Appeal’s decision
• This may permit both the FTB and taxpayers to exclude a
number of sales from their apportionment formulas
•
•
Other Types of Hedges
Loss Leaders
Potential Impact of General Mills
• The Court of Appeal’s decision may also impact alternative
apportionment analyses more generally
• It indicated that the qualitative analysis and quantitative analyses
were not independent tests
• It implied that, in addition to the treasury function paradigm and the
“no profit intent” paradigm, there may be other paradigms that
require alternative apportionment
• It noted other concerns that it considered, including the existence of
“nowhere income,” the need for state uniformity, and the total
amount of tax at issue in the case (in General Mills’ case, “millions
of dollars” for the period at issue)
North Carolina Developments
Mr. Jack Harper
Senior Director
Domestic Tax Planning & Policy
Wal-Mart Stores Inc.
Bentonville, Arkansas
History of Combined Returns in North Carolina
• December, 2007
• Wal-Mart Stores East Inc. et al. v. Hinton; 06-CVS-3928; 06-CVS3929 (December 31. 2007)
• May, 2009
• North Carolina Court of Appeals upholds Wal-Mart Stores East
Inc., v. Hinton, 676 S.E. 2d 634 (N.C. App.) app. withdrawn by
taxpayer, 363 N.C. 748 (2009)
• 2009 through 2010
• NC DOR implements several “Voluntary Compliance Programs”.
Collects around $300 million.
History of Combined Returns in North Carolina
• January, 2011
• Delhaize America Inc., v. Lay; 06-CVS-08416 (January 11, 2011)
• June, 2011
• HB 619 (Session Law 2011-390) enacted. Repeals statutes G.S. 105-130.6;
G.S.105-130.15 and G.S. 105-16.
•New statute G.S. 105-130.5A adopted .
•NCDOR can force combination if a corporation’s intercompany transactions either:
•Lack economic substance, or
•Are not conducted at FMV (using a sec. 482 standard)
• Two prong test is used to determine if transactions lack “Economic Substance”.
• Reasonable business purposes other than the creation of tax
benefits.
•Economic effects other than creation of tax benefits.
History of Combined Returns in North Carolina
• September, 2011
• SB 580 (Session law 2011-411) revised the effective date for the repeal of (G.S.
105-130.6; G.S.105-130.15 and G.S. 105-16) to “tax years beginning on or after
January 1, 2012”.
• November, 2011
• Corporate Directive CD-11-01 was issued by the NCDOR .
• January, 2012
• Taxpayer Groups (NC Chamber of Commerce, NC Retail Merchants Association,
and COST) write letter to legislature contending that Directive CD-11-01 is not
clear.
• April, 2012
• The Department issues two new Directives (CD-12-01 and CD-12-02).
History of Combined Returns in North Carolina
• June 2012
• SB 824 (Session Law 2012-43) was enacted requiring the NCDOR to
expeditiously adopt formal rules for using its authority to require forced combined
returns. SB 824 placed the 2012 Directives on hold awaiting the DOR to
implement new rules on forced combination under G.S. 105-130A. No forced
combination allowed for years after 2012 until rules are adopted.
• August 2012
• North Carolina Court of Appeals rules against Food Lion. Delhaize America
Inc. v. Lay; No. COA11-868, No. 07 CVS 20801.
• October 2012
• The Department issues proposed rules on forced combination, solicits
comments, and schedules public hearing for November 28, 2012.
FEATURING SPECIAL GUESTS:
Mr. Mark Eidman
Senior Partner
Ryan Law, LLP
Austin, Texas
Mr. Fred Nicely
Tax Counsel
Council On State Taxation
Washington, DC
Texas Franchise (Margins) Tax
• Allcat (2011) – TX S.Ct. held that the margins
tax was not imposed on the net income of
natural persons (i.e., not an income tax)
• In re Nestle USA, Inc. (TX S.Ct. Case No. 120518, writ of mandamus) – Argument that
Margins Tax violates U.S. and Texas
Constitutions (e.g., not equal and uniform)
Texas
Texas Franchise (Margins) Tax
• Nestle (cont.)
• Mandamus relief denied on October 19, 2012
•
•
•
Justice Hecht opinion – upheld the 1% rate applied to
manufacturers as equal and uniform and rationally
related to the privilege of doing business in Texas.
No violation of Commerce Clause because tax is based
on activity, not location.
Justice Willett dissent – Court lacks original jurisdiction,
not conferred in Texas Const. or Tax Code.
Texas
Texas Franchise (Margins) Tax
• Comptroller Policy Change
•
•
Effective June 2012, taxpayers may amend
franchise tax reports to change their election, or to
make an election, to use the Cost of Goods Sold
(“COGS”) or the compensation deduction.
Resulting from Taylor & Hill, Inc. v. Combs, et al.
(Cause No. D-1-GN-10-004429), July 7, 2011
Texas
Texas Franchise (Margins) Tax
• Newpark Resources, Inc. v. Combs (Cause No.
D-1-GN-11-002205)
– Judgment for Plaintiff – Newpark Environmental
Services, LLC could deduct certain expenses
relating to disposal and reclamation services
performed at oil and gas wells as COGS.
– Comptroller filed Notice of Appeal on August 1, 2012
Texas
Texas Franchise (Margins) Tax
• Nextera Energy Power Marketing, LLC v.
Combs (Cause No. D-1-GN-12-001372)
– Whether certain expenses relating to the generation,
transmission, and distribution of electric energy are
deductible as COGS.
– Processing tangible personal property v. service
– Discovery phase
Texas
Texas Franchise (Margins) Tax
• Graphic Packaging Company v. Combs (Cause
No. D-1-GN-12-003038)
• Texas adopted MTC apportionment in Tax Code,
Chapter 141 – This was not considered when
Chapter 171 was amended to impose Margins Tax.
• Graphic Packaging argues they can choose single
or three-factor apportionment because Margins Tax
is based on income.
Texas
Texas Sales and Use Tax
• Amazon settlement – Amazon agreed to start
collecting Texas sales tax July 1, 2012, create
2,500 jobs, and invest $200M
Texas
Texas Sales and Use Tax
• Roark Amusement (plush toys – sale for resale
as part of a taxable service)
• Argued before TX S. Ct. on October 15, 2012
• Proposed Rules
• Modifications to Rule 3.325 re: Refund Claims
• Letter Ruling Requests (no longer anonymous)
Texas
CAT 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
• Beaver Excavating v. Levin
– CAT on motor fuel upheld (thus far)
– TP appealed to Ohio Supreme Court on 9/9/11
– Court accepted discretionary appeal and oral arguments presented on
7/11/2012
• 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
– Case is now pending before the Ohio Board of Tax Appeals
Ohio
– Tax Department has issued several FD’s on this issue
Additional CAT Litigation
• Who is the Common Owner
– CGI Holdings, LLC (FD issued 2/29/2012) – seeks consolidated elected
taxpayer group status to exclude intercompany receipts
– Law states “owned or controlled” but a regulation uses “owned and
controlled” that is focused on voting rights – not ownership interest
• NOL Credit Cases
– Must have an Ohio NOL of at least $50 million – cases pending on what happens if
NOL subsequently adjusted below $50 million
• CAT Allocation v. Apportionment
– DIRECTV, Inc. (BTA Case 2011-522)
– Refund request based on CAT not being “fairly apportioned”
– CAT receipts are technically taxed based on taxable situs
Ohio
Ohio CAT – Revenue
•
•
•
•
•
CAT had 3 Statutory Measurement Periods – none required
adjustment to CAT (only if 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%]
CAT collected $1.66B for FY 2012 – Target: $1.5B [+10.7%]
Ohio
Administrative CAT Compliance 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) and 3-year look back period (plus current year)
• CAT Division’s Nexus Unit
– Has sent over 14,000 letters/notices
– 55% penalty if assessment issued plus $1,000 failure to register penalty
• General Amnesty - 5/1/2012 to 6/15/2012
– Over 300 taxpayers applied for CAT amnesty netting $10 million in
additional tax (figure is just for the CAT)
Ohio
2012 CAT Legislation
• Sub. H.B. 508 - Effective Sept. 4, 2012
– $1 million exclusion can be taken in first quarter until used – no longer
$250,000 per quarter
– Certain non-qualified insurance companies (surplus lines insurance) not
subject to the CAT
• This is likely to address the possibility of the CAT being imposed on
subsidiaries of insurance companies in the future
– Misc. sales tax changes for Ohio to conform to the SSUTA
– Pending Bills
– S. B. 278 – credits to hire unemployed & provide broadband services in
rural areas
Ohio
– H.B. 494 – $2,000 credit to hire veterans
Financial Institution Tax Reform
H.B. 510 – Passed House & Pending in Senate
– Banks (FIs) and Dealers in Intangibles (DITs) currently taxed on net worth basis
(FI – 13 mills & DIT 8 mills)
– Proposal to broaden the base using capital reported to the Federal Reserve
Board
• $200 million or less of apportioned NW – 8 mills
• $200-$1.3 billion of NW – 4 mills
• NW above $1.3 billion – 2.5 mills
– Compromise with DITs – DITs not affiliated with an FI will be subject to CAT in the
future (most interest and capital gains are excluded from the CAT)
– Bill is likely to pass before end of this year
– CAT exemption for subsidiaries of insurance companies will likely be phased out
– $200 million target for 2014 – rate adjusted if below by 10%
Ohio
Municipal Income Tax Reform
• H.B. 601
– Over 500 local governments in Ohio impose a tax on the income earned
from businesses, workers and residents located within their jurisdictions
– Most intangible income is excluded
– Fairly significant changes made in 2003 – more needed
•
•
•
•
•
Uniform interest rate – same rate used for state taxes
Uniform combined/consolidated filing procedures
Uniform treatment of NOLs
Uniform statute of limitations
Create municipal tax policy board to establish statewide forms/rules
– Bill will likely not pass this year – very likely to see reintroduction and
movement next year
Ohio
Potential Tax Proposals Next Year
• FY 2014/2015 Budget
– Governor’s proposed budget will likely focus on personal income tax rate
reduction – highest rate presently 5.9%
– Revenue Loss Offsets:
• Sales Tax
– Current exemptions likely to be scrutinized
– Base broadening to subject additional services to tax
• Severance Tax
– Hydraulic fracturing of shale is occurring in Ohio
– Governor Kasich proposed an increase in severance tax on oil and gas from shale wells
– Ohio General Assembly did not act this year – may be taken up next year
Ohio
Ohio’s Use Tax Amnesty Program
•
Current Use Tax Amnesty Program – 10/1/2011 to 5/1/2013
– Companies that enter the program must agree to remit all use taxes
incurred since January 1, 2009 to amnesty filing
– Waiver of interest & penalties and prior periods liability forgiven
– Taxpayer can enter into payment plan
– Caution – amounts paid are nonrefundable
– $17 million in use tax amnesty collections thus far
– Is this the longest amnesty program in history?
Ohio
Ohio BTA Reform Still on the Menu
• Ohio Board of Tax Appeals still has a backlog
– Unfortunately, many of the cases being decided are merely dismissals
– H.B. 505 introduced this year is on hold
– Ohio State Bar Association is trying to move legislation
• Proposed changes:
–
–
–
–
–
–
–
Creation of a small claims process – cases <$10,000 (voluntary & not appealable)
Provide additional funding for BTA
Allow appeals to be filed through the Ohio Business Gateway
Require the Tax Commissioner and BORs to electronically file transcripts
Development of a formal case management program
Adoption of uniform rules of practice and procedure for BORs
Ability to raise additional issues
Illinois Developments
Mr. Jason Wyman
Partner
Deloitte Tax LLP
Chicago, Illinois
Illinois — Legislative Action
• P.A. 97-1129 – Tax Tribunal
•
•
•
•
Organized separate and independent from Department of Revenue
Effective July 1, 2013
Informal Conference Board enhancement
Department of Revenue matters excluding exemptions
Illinois — Legislative Action – Cont'd
• P.A. 97-0905 – Enterprise Zones
• Initial enterprise zones set to expire 2012
• Zones expiring through July 1, 2016 extended through July 1, 2016
• Enterprise zone benefits include:
• Income tax incentives
• Sales tax incentives
• Utility tax incentives
• Addresses zones set to expire
• Income tax jobs credit, dividend deduction and interest deduction for
financials are eliminated
• Building materials sales tax exemption is modified
Illinois — Legislative Action – Cont'd
• P.A. 97-0688 – Income Tax Credit – For-Profit Hospitals
• Appears transferrable
• Can it be bought/sold?
• P.A. 97-0767 – Wage Credit – Unemployed Veterans
• 20% of wages
• Tax Years after 12/31/12 and before 12/31/16
• P.A. 97-0749 – Department of Commerce and Economic Opportunity
required to disclose terms of future Illinois EDGE Credit agreements
Illinois — Legislative Action – Cont'd
• P.A. 97-0976 – Sales tax revenue sharing agreements must be made
public and filed with Department of Revenue.
• P.A. 97-1074 – Increase to criminal tax penalties, notably “sales tax
evasion”
• SB 282 – Corporate Tax disclosure for public corporations
• Cook County – Use tax on Non-Titled Tangible Personal Property
Illinois Click-Through Update
Performance Marketing Association v. Hamer, Circuit Court of Cook
County, No. 2011 CH 26333 (May 7, 2012)
– Violates Commerce Clause and preempted due to federal moratorium
on discriminatory states taxes on electronic commerce pursuant to
Internet Tax Freedom Act
– P.A. 96-1544 provided “click-through” nexus
– Summary Judgment in favor of plaintiff, court did not enjoin
enforcement of statute
Litigation
Metropolitan Life Insurance v. Hamer, 2012 Ill. App. 1st 110400
– Illinois 2003 Amnesty – pay taxes without penalty or interest; however
double penalties and interest for payments after Amnesty period
– Federal Audit finalized in 2004 for period covered by Amnesty
– DOR assessed double penalty and interest
– Taxpayer prevailed
Litigation
Marriott International Inc. v. Hamer, 2012 Ill. App. Ct 1st 111406
– Similar facts to Metropolitan Life
– IRS began audit after Amnesty ended for periods covered by Amnesty
program
– Company still had an obligation to accurately report taxable income
including amounts “properly reportable”
Litigation
Clarcor, Inc. v. Hamer, 2012 Ill. App. Ct 1st 111674
– Filtration and packaging business units unitary
– Centralized cash management, common pension, 401(k) and health
insurance plans
AT&T Teleholdings v. Illinois Department of Revenue, (June 1, 2012),
2012 IL App (1st) 110493-U
– Capital Loss Carryback originating from combined return may be
carried back to separate return year.
Litigation
Witte Brothers Exchange, Incorporated v. Illinois Department of Revenue,
Case No. 11-L-50282 (February 16, 2012)
– Pass through miles not includible in numerator of sales apportionment
factor
Panhandle Eastern Pipeline Company v. Illinois Department of Revenue,
Circuit Court of Cook County, Case No. 09-L-051281
– Natural gas transported through Illinois as part of an interstate journey
not includible in numerator of sales apportionment factor for years at
issue
Illinois Home Rule Updates –Litigation
Hartney Fuel Oil Company v. Hamer, (September 17, 2012), 2012 IL App
(3rd)
– Local sales tax reporting jurisdiction for fuel tax sales
– Hartney accepted and approved orders in jurisdiction with no local
sales tax
– Prior audit files destroyed by DOR, therefore not relied upon in current
decision
Maine / New Hampshire Developments
Mr. Jonathan Block
Partner
Pierce Atwood LLP
Portland, Maine
Maine Board of Tax Appeals
3 Person Citizen’s Board Established
Ex Parte Communications Prohibited
Settlements Encouraged
De Novo Review to Board, then De Novo
Review to Superior Court
• Staffed by Independent Hearing Officers who
Recommend Decision to the Board
•
•
•
•
Aircraft Use Tax
• Maine program of assessing 5% use tax on aircraft landing
in Maine
• Two test cases decided by the Maine Supreme Court
• Exemption for property purchased and used outside of the
State during first 12 months of ownership
• Maine Supreme Court held in 2011 that use tax must be
thrown out if aircraft was substantially used outside the
State.
Aircraft Test Cases
Blue Yonder v. STA: Present in Maine 21 days. No use tax
Victor Bravo v. STA: Present in Maine 156 days. Use tax
upheld
Mile High Air v. Assessor (2012)
• In Maine for parts of 87 days; outside of Maine entirely for
278 days during first year of ownership
• Superior Court held exempt from use tax
Use Tax Compliance Program
Repeat of earlier successful amnesty program
Runs in October and November, 2012
Applies to unassessed use tax
Taxpayer agrees to pay use tax only for highest 3 years
out of last 6 years (2006 through 2011)
• Taxpayer absolved of tax liability and interest for all
other years, and absolved of civil and criminal penalties
•
•
•
•
NH Proposed
Constitutional Amendment
• Amendment would prohibit taxes on income earned
by a natural person other than taxes in effect on
January 1, 2012 or adjustments to the rate of such
taxes.
• Result?
Appeal of Seabrook
• Property Tax Exemption for Pollution control equipment
• Containment systems and other systems designed to
prevent release of radiation did not qualify for exemption
• 15 other pieces of equipment did qualify
• Reason: facility must actively or routinely treat pollution vs.
operating only in abnormal conditions
• Loss of cooling accident was merely speculation
FEATURING SPECIAL GUESTS:
Mr. Jason Zorfas
Mr. Richard Genetelli
Executive Director, State and
President
Local Tax
The Genetelli Consulting Group
Ernst & Young LLP
New York, New York
Boston, Massachusetts
Mr. David Shipley
Partner
McCarter & English, LLP
Philadelphia, Pennsylvania
Massachusetts – Unitary
Developments
• No major statutory or administrative changes
• Unitary audits beginning
• Letter Ruling 12-9 – HMO can be included in unitary
return and is not an excluded insurance company
• Starting with 2011 returns separate net worth / property
tax of unitary members is reported on unitary return
• Application of Economic Nexus to Foreign
Corporations for Purposes of the Non-Income Measure
MA
Massachusetts –
Cloud Computing / SAS
•
Guiding Principles
•
•
•
•
true object test
who controls the use of the software?
is there actually a license of software?
impact if an applet is provided?
MA
Massachusetts –
Negligence Penalty Guidance
• G.L. Chapter 62C, s. 35A imposes penalty for
understatements of tax greater than 10%
• Working Draft Directive 12-xx (10/5/12) explains
exceptions
• Reasonable cause / good faith exception
• Substantial authority and/or adequate
disclosure
MA
Massachusetts – Cases
•
•
•
•
Sales Factor Sourcing - The Income Producing Activity Test:
AT&T Corp. v. Commissioner of Revenue (July 2012, Court of
Appeals)
Qualifying as a Manufacturing Corporation: Random House,
Inc. v. Commissioner of Revenue (October 2012, ATB)
Add Back of Intangible Expense – “Embedded Royalties:”
Kimberly-Clark Corporation and Kimberly-Clark Global Sales,
Inc. v. Commissioner of Revenue (January 2011, ATB)
Cash Management Systems: Sysco Corporation v.
Commissioner of Revenue (October 2011, ATB)
MA
Massachusetts –
Administrative Update
• DOR to appoint 15 member Advisory Council
• Streamlined settlement program for cases in excess of $1 million
– Can be initiated any time after audit issues are developed
– Optional for both DOR and the taxpayer
– Mediator can be DOR employee or an independent party selected by the
taxpayer with DOR approval and paid for by the taxpayer
• DOR solicits input on construction contractor regulation project
• Directive 12-5 – Business subject to state tax as corporations must register
on-line by April 1 in order to be treated as corporations for local property tax
purposes
MA
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
NY
New York State and City
Amended Combined Reporting Rules*
•Ownership
•Substantial Intercorporate Transactions
–Intercorporate receipts
–Intercorporate expenditures
–Intercorporate asset transfers
•Proposed Amendments to Regulations Largely Incorporate 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
NY
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
NY
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
NY
New York State
Withholding Tax Audit Initiative
• Hot Issue
– Bright-line standard – 14 day rule
•
TSB-M-12(5)I
– 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
NY
Other New York Developments
• Whistleblower Lawsuits are on the Rise
• New York State False Claims Acts
• Sprint Nextel
• Responsible Officer Liability Poses Risk for Key Executive Officers
• Steinberg
• MTA Payroll Mobility Tax Struck Down
• Mangano v. Silver
• NYC Suspends Position on UBT Audits
• Expenses were to be shifted away from investment management entities
NY
Gletfelter Puplwood Co.
• Nonbusiness Income Definition Changed in 2001 to Read
“either the acquisition, management or disposition…”
• Legislature Declared that the Intent of the Amendment
was “to clarify existing law.”
• Commonwealth Court Held that Gain was Business
Income Under Any Test.
• Addressed Legislative Intent in a Footnote.
• Pending before Pennsylvania Supreme Court.
PA, NJ
Sales and Use Tax
• Northeastern PA Imaging Center – MRI Machines Don’t
Constitute Real Property.
• “Cloud Computing” is Subject to Sales Tax if the User of
the Canned Computer Software is in Pennsylvania (L.R.
SUT-12-001).
• Remote Seller Nexus (News Release Dec. 1, 2011 and
Jan. 27, 2012) – Remote Sellers had until September 1,
2012 to Register and Begin Collecting Sales Tax.
PA, NJ
Pennsylvania Policies
•
•
•
•
Penalty Abatement at Audit Level
Settlement Authority at Board of Appeals
No Bond to Play
Voluntary Disclosure Program is Back
PA, NJ
New Jersey Transfer Pricing
• Audit contract with Chainbridge lapsed.
• Issued TAM-17 in 2011
• Issued TAM-2012-1 Which Recognizes
Similarity with Arm’s-Length Pricing
Requirements of IRC § 482.
PA, NJ
Intangible Nexus
• Lanco & Praxair – Intangible Holding
Companies are Taxable and You Should Have
Known It.
• Prior “Deal” in 2007 – Lookback to 1996, 5%
Amnesty Penalty, 9% of N.J. Gross Receipts.
• New “Deal” – Lookback to 2004, 5% Penalty,
50% of Additional Tax Due for Throwout.
PA, NJ
Beyond Trademarks?
• Prior Initiative Regarding Banks Having Economic
Nexus in New Jersey.
• Tax Court Previously Decided Cases for Quark /
Accuzip.
• Cases Pending Regarding Use of Patents Outside
the State to Produce Products Sold in New Jersey.
• Cases Pending Regarding Use of Copyrights and
Software in the State.
PA, NJ
Division of Taxation Initiatives
•
•
•
•
•
140 New Auditors
Expansion of Emphasis on Fraud
Posting of Audit Manual On-Line
Greater Discretion to Conferences & Appeals
Greater Coordination with Attorney General’s
Office
PA, NJ
BIS
• Appellate Division Remanded to the Tax Court for Issue
Not Raised Previously.
• Division Argued that Partnership (and not the Partner)
Was Entitled to Refund but the Statute Had Run.
• Tax Court Found that the Partner was Entitled to a Refund
of the Tax Paid by the Partnership.
• Tax Court relied on 2001 Legislative History for 2002
Statute
PA, NJ
What’s
Happening
Friday
November 30, 2012
Holiday Greetings!
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