Multi-state Tax Update – Convergence 2013
Dallas CPA Society
Mike Williams and Melissa Wofford
May 8, 2013
Income and Franchise Tax
1
Apportionment of sales other than sales of
TPP
Cost of Performance
•
Direct costs determined in a manner consistent with
generally accepted accounting principles and in
accordance with accepted conditions or practices in
the trade or business of the taxpayer to perform the
income producing activity which gives rise to the
particular item of income. Included in the taxpayer’s
cost of performance are taxpayer’s payments to an
agent or independent contractor of the performance of
personal services and utilization of tangible and
intangible property which give rise to the particular item
of income
2
Apportionment of sales other than sales of
TPP
Market sourcing of sales of services
•
•
Receipts are attributed to where the services are
delivered, and not where the services are performed
In general, delivery can occur where the customer is
located or where the benefit of the services are
received
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Apportionment of sales other than sales of
TPP
Cost of Performance Considerations
• How are direct costs defined?
• Should independent contractors be
considered?
• Indirect costs
• GAAP
• Marketing activities
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Apportionment of sales other than sales of
TPP
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Recent cost of performance decisions
• AT&T v. Comm (MA App. Ct. 2012)
• JRS Distrib’n Co. v. Treasurer (MI Ct. of
Appeals 2012)
• Michiana Metronet v. Treasurer (MI Ct. of
Appeals 2012)
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Alternative Apportionment
Uniform Division of Income for Tax Purposes Act
(UDITPA) Section 18
• Mississippi – Equifax Inc. v. DOR
• Tennessee - Vodafone Americas Holdings,
Inc. v. Roberts
• Indiana – Letter of Finding 02-20110473
• Illinois – IT-13-0001
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Alternative Apportionment
3 Factor Challenges
• California - Gillette
• Michigan - IBM
• Texas – Graphic Packaging
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Current Trends
Texas – Franchise Tax
COGS – Comptroller revised revised rule for
deductions
Governor Perry’s proposals
Legislative session set to conclude in May
Flurry of lawsuits filed
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Current Trends
Texas – Compensation Deduction
Winstead PC v. Combs, No. D-1-GN-12-000141
Statute allows a taxpayer to deduct the cost of all
benefits to the extent deductible for federal
income tax purposes
District Court found regulation exceeded the
Comptroller’s statutory authority
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Current Trends
California – Single sales factor
All tax years after 1/1/13 requirement to
apportion income using single sales factor for all
apportioning businesses
Partnerships – rule applies regardless of the
form of ownership and unitary relationships
Partnerships with non-resident partners should
take this into consideration for ES/withholding
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Current Trends
California – attribution of nexus among partners
SUP, Inc., Case No. 571262 (adopted Nov. 14,
2012)
Nevada general partner in a Nevada partnership
subject to CA min franchise tax
A partnership is actively managed by its general
partner at the location of the general partner and
the activities of the partnership are attributed to a
general partner
Limited partner?
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Current Trends
District of Columbia – Statute of Limitations
Office of Tax and Revenue v. Sunbelt Beverage
LLC; No. 10-AA-1331
OTR could not issue and assessment against a
taxpayer three years after the taxpayer had filed
a return on an incorrect form
D-30 v D-65
The form filed by the taxpayer represented a
good faith attempt to file a return and set forth
the necessary information to correctly determine
the amount due
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-
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Current Trends
Kentucky – Intercompany Management Fees
HB 440 (March 26, 2013)- passed the house
waiting for signature
Planning benefit
Company could deduct from its corporate income
tax base payments made to a related party for
management services (e.g. accounting, payroll,
insurance, data processing, etc.)
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Current Trends
Louisiana - UTEL Com, Inc. and UCOM, Inc. tax
cases.
A holding company was not subject to Louisiana
franchise tax because the company lacked a
physical presence in the state
The companies only presence in the state is by
virtue of a limited partnership interest in a
company conducting business in the state as a
partnership
March 2012, the Louisiana Supreme Court
denied the review of these tax cases.
-
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Current Trends
New Mexico – HB 641-Tax law changes
Corporate income tax rate reduced from 7.6% to
5.9% over a five year period
Beginning 2014, mandatory unitary combined
filing requirement for retailers making retail sales
of goods in a facility of more than 30,000 sq ft
under one roof
Elective single sales factor apportionment will
phase in over five years for manufacturers
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Current Trends
Oklahoma – corporate income tax capital gains
CDR Systems Corporation v OTC, Case No.
109886
OK capital gains deduction unconstitutional
OK companies were granted preferential
treatment over non-OK companies in violation of
the Commerce Clause
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Current Trends
Multistate Tax Commission – Article IV
Business/Non-business income
Double-weighting of sales factor
Definition of Receipts for sales factor purposes
Sales other than sales of tangible personal
property
Alternative apportionment rules
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State Amended Returns for RARs
-
No uniform state statutes/rules
When are reporting deadlines – 30, 60, 90, 120,
180 or more
Final determination date is critical
Penalty and interest
Documentation
Expect notices!
Other complications or complexities
Plan, plan, plan
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Series LLCs
-
A form of limited liability company that provides
liability protection across multiple series each of
which is theoretically protected from liabilities
arising from the other series
Federal Proposed Reg 301.7701(a)(5)
State adoption
Limitations
Planning
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Sales and Use Tax
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Proposed Federal Legislation - Nexus
Marketplace Fairness Act of 2013
•
•
•
•
Grants states authority to compel remote sellers (online
and catalog retailers) to collect and remit sales/use tax
The Act requires states to simplify their sales tax laws
States are eligible to require collection by remote sellers
by either:
- Being SST member state
- Implementing the Act’s minimum simplification
requirements
Small Seller Exception – applies to remote sellers with
total gross annual revenue of less than $ 1 million
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Click–through Nexus

New York – “Amazon tax”
- an out of state seller soliciting sales through an
independent contractor, agent, or other
representative if the seller enters into an
agreement with a New York resident for a
commission.
- the representative directly or indirectly refers
potential customers to the seller whether by link,
internet website or otherwise (click-through
nexus)
- gross receipts total more than $10,000
22
Click-through Nexus

Kansas approved legislation enacting clickthrough nexus on April 16, 2013
- goes into effect 90 days after enactment
- a retailer is presumed to be doing business
in the state when entering into an agreement
with a Kansas resident for a commission
- refers potential customers by: link, internet
website, telemarketing, in-person oral
presentation
- cumulative gross receipts of $10,000/year
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Click-through Nexus

Georgia has passed legislation implementing
click-through nexus on April 19, 2012
- has the same language as other states
regarding using “click through” marketing
using representatives in Georgia
- exception: if gross sales from referrals by
click-through is under $50,000 annually and
attend trade shows solely for less than 5
days in Georgia
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Cloud Computing - Overview
•
•
•
•
•
Software as a Service (“SaaS”)
Application Service Provider (“ASP”)
SaaS and ASP are new business models for
software delivery (“cloud computing”)
Software applications provided over the
internet as a service rather than license of
tangible personal property
Allows customers to access software
applications over the internet through a third
party provider
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Cloud Computing - Overview
•
Sales Tax Implications/Questions
- does the provider have nexus?
- is it a sale or license of canned software or
performance of a service?
- is the “true object” test applicable?
- if a sale of service, is the service taxable?
(information or data processing services)
- if a sale of software, is it canned or custom
software?
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Cloud Computing – Recent State Rulings
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
Idaho – HB 243 enacted on April 3, 2013
- provides that software accessed through the
internet is not tangible personal property for
sales/use tax purposes and therefore, is exempt
Massachusetts – issues Working Draft Directive
13-XX on February 7, 2013
- if “true object” of transaction is access to
software then transaction will be taxable.
- if “true object” of transaction is to obtain a
benefit of third party’s services then not taxable.
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Cloud Computing – Recent State Rulings

New Mexico – Ruling No. 401-13-1 (1/31/13)
- out of state’s business’ sales of online
software on subscription basis to users in
New Mexico is taxable for gross receipts tax.
- transactions were sales of intangibles
sourced to location where internet was
accessed
- consulting and data analytic services
performed outside New Mexico are exempt
even if product initially used in New Mexico
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Cloud Computing - Texas

Cloud Computing Services: allows
customers to access software and used on
company’s servers through the cloud
- customers are not required to use specific
software nor download any software
- no software license is sold or transferred
- cloud computing billed based on usage
- Taxable as data processing services which
includes “computerized data and information
storage or manipulation.”
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Resale and Exemption Certificates
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Resale and Exemption certificates are
getting looked at closer by state auditors
Auditors verifying fully completed with
correct information and wording
States issuing specific registration numbers
and/or certificates instead of blank forms
(e.g., Texas agriculture exemption, Louisiana
resale and manufacturing exemption forms)
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Biography
Mike Williams (972) 764-7025, mike.williams@mcgladrey.com
Mike is the Dallas SALT practice leader for McGladrey LLP and serves in various
leadership roles with the firm. Mike has over 19 years experience in public accounting
with approximately 17 years experience in the state and local tax area. Prior to joining
McGladrey LLP in October 2006, Mike spent 9 years practicing with a Big 4 accounting
firm. He has assisted clients in the manufacturing, technology, retail, real estate,
distribution, energy and service industries. Mike’s extensive experience includes Texas
franchise tax consulting, restructuring implementations, voluntary disclosure agreement
negotiation, merger and acquisition consulting, tax compliance management, refund
reviews, nexus studies, state audit defense, and state income tax provision consulting.
Professional Affiliations and Credentials
American Institute of Certified Public Accountants (AICPA)
Texas Society of Certified Public Accountants (TSCPA)
State Taxation Committee of the Texas Society of Certified Public Accountant
Texas Taxpayer and Research Association
Louisiana Society of Certified Public Accountants
Association for Corporate Growth
Education
Bachelor of Science in Accounting – Louisiana State University
Masters in Business Administration – University of New Orleans
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Biography
Melissa Wofford (972) 764-7042, melissa.wofford@mcgladrey.com
Melissa is a director in McGladrey LLP’s State & Local Tax Practice in Dallas,
Texas. She specializes in sales and use tax consulting. She assists
companies with their sales and use tax issues in all states, with a focus in Texas,
Oklahoma, Arkansas, and Louisiana. Melissa has over thirteen years of experience
in the state and local tax area working with a wide range of industries including
manufacturing, food processing, retail, restaurant, distribution, service, oil and
gas, financial institutions, healthcare, and entertainment. Examples of expertise in
the state and local tax area include: audit defense, refund reviews, reverse sales
and use tax audits, multi-state sales and use tax planning, managed audits and
voluntary disclosure agreements
Professional Affiliations and Credentials
Certified Member of the Institute for Professionals in Taxation (CMI)
Education
BS in Accounting, Texas Tech University – Lubbock, TX
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