COST - Key State Tax
Developments
Northeast Region
November 2015
Today’s agenda
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Key State Tax Developments – Northeast Region
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Connecticut
Massachusetts
New Jersey
Pennsylvania/Philadelphia
District of Columbia
Maryland
November 2015
Key State Tax Developments – Northeast Region
Today’s presenters
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Jon G. Spisto
Deane R. Eastwood
Matt J. Shetzline
Ernst & Young LLP
New York, NY
Ernst & Young LLP
McLean, VA
Ernst & Young LLP
Philadelphia, PA
Connecticut
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November 2015
Key State Tax Developments – Northeast Region
Connecticut budget bill and budget
implementer bill
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PA 15-244 (budget bill, enacted 30 June 2015) contains
significant corporate, personal income and sales/use tax
law changes
SB 1502 (budget implementer bill, enacted 30 June 2015)
contains several notable changes to the FY 2016-17
budget bill PA 15-244
To understand what Connecticut did, you have to read
BOTH acts and realize the second changes provisions of
the first … really confusing!
Collectively, we’ll refer to the two bills as the Act
Plus recent comments from the State
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November 2015
Key State Tax Developments – Northeast Region
Connecticut budget bill and budget
implementer bill
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Key provisions of the Act:
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Adopt mandatory unitary combined reporting for corporations
Limit use of net operating losses (NOLs) and credits
Extend the corporate tax surcharge
Expand the scope of computer data processing services subject to sales
tax
Increase the luxury sales and use tax rate
Eliminate the sales and use tax exemptions for certain clothing and
footwear
Increase the top individual income tax rate and impose a new, higher rate
on high wage earners (6.99%)
Delay the expiration of the moratorium on the issuance of new film tax
credits
Delay various benefits (e.g., increased deduction, property tax credits) for
individual income tax filers
November 2015
Key State Tax Developments – Northeast Region
Corporate income tax changes
Mandatory combined reporting
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Effective for taxable years commencing on and after 1
January 2016, Connecticut adopts mandatory unitary
combined reporting
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Similar to the current law, corporations calculate their
Connecticut tax liability on the basis of both net income
and capital base
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The Act repeals the current preference tax applicable to
elective combined return filers, since the filing method is
now mandatory
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November 2015
Key State Tax Developments – Northeast Region
Corporate income tax changes
Defining the combined group
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A combined group includes all unitary members with 50% or more
voting control owned by common owner(s)
The combined group can include taxable (nexus) and nontaxable
(non-nexus) members, and it only needs one taxable member
The combined group’s net income, additional tax base and the
apportionment factors are determined on a water’s edge basis (if no
worldwide or affiliate group election is made), and includes any
taxable or nontaxable member that:
(1)
(2)
(3)
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Is incorporated in the US, or formed under the laws of the US, unless
80% or more of both its property and payroll are located outside the
US;
Is incorporated or formed anywhere if 20% or more of both its property
and payroll are located outside of the US; or
Is incorporated in a jurisdiction that is determined by the commissioner
to be a tax haven
November 2015
Key State Tax Developments – Northeast Region
Corporate income tax changes
Defining the combined group – tax havens
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What’s a “tax haven”?
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The Act defines “tax haven” to include jurisdictions:
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Lacking transparence,
Favorable for tax avoidance and
With laws preventing effective exchange of information with other
governments for tax purposes
The Commissioner is required to publish a list of tax haven
jurisdictions no later than 30 September 2016
November 2015
Key State Tax Developments – Northeast Region
Corporate income tax changes
Combined group income
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The combined group income is the aggregate net income
or loss of every taxable member and non-taxable member
of the combined group derived from a unitary business
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Include the direct and indirect distributive share of a passthrough entity’s unitary income
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Eliminate intercompany dividends
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Treat deferred intercompany transactions in a manner
similar to the federal consolidated return regulations
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November 2015
Key State Tax Developments – Northeast Region
Corporate income tax changes
Apportionment
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Each member of the combined group calculates its own apportionment based
on the formula applicable to that member. Combined denominators are used
when calculating each member’s apportionment, regardless of whether a
member utilizes that factor in its own apportionment formula, and it includes
taxable and non-taxable member data
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The receipts factor numerator includes the receipts assignable to Connecticut
from all taxable members
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The receipts assignable to Connecticut from non-taxable members are
distributed proportionately among the taxable members and are included in
the receipts numerator. Intercompany transactions are eliminated from both
the numerator and denominator
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Sales factor sourcing rules have not been modified
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Each member of the combined group calculates its apportioned net income or
loss by applying its apportionment percentage to the combined group net
income
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November 2015
Key State Tax Developments – Northeast Region
Corporate income tax changes
Combined group NOLs
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A taxable member may carry over its post-apportioned NOLs
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For NOLs incurred by a taxable member after 1 January 2016, the
NOL may be shared with other entities that were members of the
combined group in the year that the loss occurred
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Pre-1 January 2016 losses of a taxable member may be shared
among other entities that were a member of the same elective
combined group (either consolidated nexus or unitary)
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Effective for income years beginning on or after 1 January 2015,
the NOL carryforward is limited to the lesser of
1) 50% of apportioned net income, or
2) The excess of NOL over the net operating loss being carried
forward from prior income years
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November 2015
Key State Tax Developments – Northeast Region
Connecticut
Sales and use tax items
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PA 15-244 as amended by SB 1502 (enacted 30 June
2015)
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Expand the scope of computer data processing services subject to
sales and use tax to include the creation, development, hosting,
and maintenance of a web site, effective 1 October 2015
Increase the luxury sales and use tax rate to 7.75% (from 7%),
effective 1 July 2015
November 2015
Key State Tax Developments – Northeast Region
Massachusetts
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November 2015
Key State Tax Developments – Northeast Region
Massachusetts
Recent developments
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FAS 109 deduction
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HB 4001 (enacted 11 July 2014) – Delays the FAS 109 deduction
related to the adoption of combined reporting until 2016 and
amends combined reporting administrative provisions
17 July 2015 compromise agreement between Governor and
legislative leaders will delay the FAS 109 deduction related to the
adoption of combined reporting, which was scheduled to take
effect in 2016, for an additional five years and extend the period to
claim the deduction from seven years to 30 years
Market based sourcing
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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
November 2015
Key State Tax Developments – Northeast Region
Massachusetts
Judicial developments
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The First Marblehead Corp. (Mass. Sup. Jud. Ct., 28 January 2015) –
DOR properly treated the loan portfolios of an out-of-state holding
company's property as being located wholly in Massachusetts and,
therefore, included in the numerator of the company's property factor
Staples, Inc. v. Mass. Comr. of Rev. (Mass. App. Tax Bd. Sept. 4,
2015) – Intercompany transfers associated with a cash management
system (CMS) did not give rise to bona fide debt either for purposes
of the net income portion or the net worth portion of the corporate
excise; therefore, the parent company of wholly owned office supply
retail subsidiaries could not reduce its corporate excise tax by
deducting the transfers as interest expenses
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November 2015
Key State Tax Developments – Northeast Region
New Jersey
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November 2015
Key State Tax Developments – Northeast Region
New Jersey
Recent developments
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Related party add-back
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Morgan Stanley & Co. (N.J. Tax Ct. 29 October 2014) – A financial
services company was entitled to a deduction for interest paid on loans to
related parties under the unreasonable exception to the related party
interest and expense add-back provisions
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Throwback and throwout rules
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Division of Taxation "acted unreasonably" by not examining the facts cited by
the company to determine if they supported the unreasonable exception
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
Single sales factor phase-in
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Phase in 2012-2014
November 2015
Key State Tax Developments – Northeast Region
New Jersey
Recent developments (cont.)
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Intangible expense / intercompany transactions
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Spring Licensing Group Dkt. No. 01001-2010 (N.J. Tax Ct.
September 23, 2015) – An out-of-state company with economic
nexus (i.e., royalty income) with the state could not avoid filing a
Corporation Business Tax (CBT) tax return under the New Jersey
Supreme Court’s Lanco precedent if its related party did not
deduct the corresponding royalty expense
November 2015
Key State Tax Developments – Northeast Region
New Jersey
Judicial developments
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PPL Electric Utilities Corp. (N.J. Tax Ct. 2 October 2014) – A corporation is not
required to add-back the PA Gross Receipts Tax and PA Capital Stock Tax in
computing its NJ Corporate Business Tax (CBT), because those taxes are not
based on or measured by income, profits, business presence or business activity,
but rather are each an excise tax and property tax, respectively
Duke Energy Corp. (N.J. Tax Ct. 2 December 2014) – An energy company is not
required to add-back utilities taxes paid to North Carolina and South Carolina in
computing its CBT, because those taxes are not based on or measured by income,
profits, business presence or business activity
Toyota Motor Credit Corp. (N.J. Tax Ct. 1 August 2014) – A vehicle leasing
company that benefited from bonus depreciation for federal income tax, but not for
CBT, purposes is allowed to adjust its federal basis when determining gain from the
sale of property for CBT purposes
MCI Communication Services (N.J. Tax Ct. 20 July 2015) (not for publication) –
Taxpayer is not entitled to adjust its entire net income to reverse the effect of a
reduction in its tax attributes required by IRC §108(b) as modified by the federal
consolidated return regulations
November 2015
Key State Tax Developments – Northeast Region
Pennsylvania / Philadelphia
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November 2015
Key State Tax Developments – Northeast Region
Pennsylvania / Philadelphia
Recent developments
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Market-based sourcing
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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
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Receipts from the sale of other items that are not TPP (and are not services)
will continue to be sourced under the "costs of performance" method under
"Section 17."
Intangible expense and cost add back
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Act 52 of 2013 closes the “Delaware Loophole” by requiring companies to
add back intangible expenses and costs, including the interest expense
associated with the intangible expense and cost, effective for tax years
beginning after December 31, 2014.
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The adjustment would not apply to a transaction that did not have as “the”
principal purpose the avoidance of tax “and was done at arm’s-length rates and
terms.”
November 2015
Key State Tax Developments – Northeast Region
Pennsylvania / Philadelphia
Recent developments
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Pennsylvania capital stock/foreign franchise tax
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Philadelphia wage/earnings tax rates to go down effective
July 1, 2015
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Phase out of tax rate for tax years after 12/31/2015.
Philadelphia Department of Revenue website (June 2015) - The
City of Philadelphia Department of Revenue announced that the
Philadelphia wage tax rates will be reduced effective July 1, 2015.
The rate as of July 1, 2015 for residents of Philadelphia will
decrease from 3.92% to 3.9102%, and the rate for nonresidents of
Philadelphia will decrease from 3.4915% to 3.4828%.
Philadelphia BIRT - single sales factor phase-in for 2015
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November 2015
Key State Tax Developments – Northeast Region
Maryland
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November 2015
Key State Tax Developments – Northeast Region
Maryland
Recent Developments
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US Supreme Court: Comptroller v. Wynne - 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?
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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
Implications for other jurisidictions?
November 2015
Key State Tax Developments – Northeast Region
Maryland
Judicial developments
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Staples Inc. (Md. Tax Ct. 28 May 2015) – “Enterprise
dependency” existed and that the out-of-state
corporations were not separate business entities from instate affiliated companies, were part of a unitary business,
and thus had nexus with Maryland
ConAgra (Md. Tax Ct. 24 February 2015) – Out-of-state
intangible holding co. lacking economic substance apart
from parent has nexus in MD based on parent’s activities
(decision recently affirmed by Anne Arundel County
District Court)
In both cases Revenue Administration Division’s use of
blended apportionment formula to determine holding
company’s income upheld
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November 2015
Key State Tax Developments – Northeast Region
District of Columbia
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November 2015
Key State Tax Developments – Northeast Region
District of Columbia
Recent developments
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Income tax changes - 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 marketbased sourcing for services
Income tax changes generally effective for taxable years beginning
after 31 December 2014
November 2015
Key State Tax Developments – Northeast Region
District of Columbia
Judicial developments
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Use of Chainbridge to perform transfer pricing analysis
Microsoft decision (not appealed) rebuking Chainbridge analysis
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ALJ ruled that DC’s analysis did not distinguish between controlled and
uncontrolled transactions in its CPM methodology
ALJ held that methodology did not comport with 482 principles
Shell Oil Co., Hess Corp. and Exxon Mobil Oil Corp. – Non-mutual
offensive collateral estoppel precludes the Office of Tax & Revenue
(OTR) from relitigating the validity of assessments based on transfer
pricing analysis prepared by an OTR contractor
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“Oil companies” assessment struck down by ALJ, citing Microsoft
DC is appealing, arguing Microsoft not precedential
November 2015
Key State Tax Developments – Northeast Region