Multistate Tax
Developments and
Controversies
IIB Tax Conference
June 25, 2008
1
Multistate Tax Developments
& Controversies
 Jeff Gotlinger
E&Y
 Energy Trading SALT Issues
 California Developments
 Jim Venere
KPMG
 Everything you ever wanted to know about
47 other states
 Jim Wetzler
Deloitte
 New York & New Jersey Developments
2
Institute of International Bankers
U.S. Tax Seminar
June 25, 2008
Multistate Developments
Jeffrey B. Gotlinger
National Director FSI-SALT
Ernst & Young LLP
New York Financial Services Office
Energy Trading SALT Issues
NEXUS Issues
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Does ownership of physical commodity create nexus
P.L. 86-277
Interstate Commerce
Flash title
Storage – Inventory
Location Issues
Transmission Rights
Record Keeping
Page 4
Institute of International Bankers
Energy Trading SALT Issues
Income/Franchise Tax Issues
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Apportionment vs. Separate Accounting
Gross vs. Net Receipts in sales factor
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Inclusion in property factor
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Valuation
Special apportionment factors
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Sales of T.P.P.
Federal Tax Treatment
Oil and gas industry / utilities
Capital / Net Worth Taxes
Page 5
Institute of International Bankers
Energy Trading SALT Issues
Sales Tax Issues
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Registration Requirements
Wholesale vs. Retail Sales
Sales for Resale / Resale Certificates
Sales to end Users – Taxable?
Point of Sale vs. Destination
Exemptions for inventory
Compliance Nightmare
Page 6
Institute of International Bankers
Energy Trading SALT Issues
Other Taxes / Issues
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Property Taxes
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Excise Taxes
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Electricity considered tangible personal property
Exemption for inventory
Valuation dates
Motor Fuel, Aviation / Jet Fuel
Registration & Compliance
Utility taxes
Page 7
Institute of International Bankers
Multistate Apportionment Update
California
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Sales Factor – Amended Reg. Sec. 25137(c)
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Page 8
Interest & dividends from intangible assets held in connection with
the taxpayer’s treasury function, as well as gross receipts and
overall net gains from the maturity, redemption, sale, exchange or
other disposition of such intangible assets are EXCULDED FROM
BOTH THE NUMERATOR AND DENOMINATOR OF THE SALES
FACTOR
Treasury Function – “The pooling, management, and investment of
intangible assets for the purpose of satisfying the cash flow needs
of the trade or business”
Institute of International Bankers
Multistate Apportionment Update
California
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Sales Factor – Amended Reg. Sec. 25137(c) (cont.)
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Liquidity for business cycle
Reserves for contingencies
Reserves for business acquisitions
Includes use of futures & options to hedge foreign currency
Does not include hedging connected to trading function
Does not apply to Broker-dealers and others “principally engaged”
in business of buying and selling intangible assets
Applies to tax years beginning on or after January 1, 2007
Page 9
Institute of International Bankers
Multistate Apportionment Update
California
► Mutual Fund sourcing rule
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Amended Reg. Sec. 25137-14
Shareholder / Customer sourcing
“Finnegan” rule adopted
Effective January 1, 2007
Double-weighting of sales factor
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Page 10
No action since January 9, 2008 interested party meeting
Institute of International Bankers
Multistate Apportionment Update
California
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FTB Staff Proposal to amend Reg. Sec. 25136
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June 5th meeting
Sales factor would include receipts from activities of others on
behalf of taxpayer
Follows MTC proposal
FTB to begin formal regulation process
Market based approach to promote uniformity
FTB establishes BOB and ESOP Resolution Program
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Page 11
Program runs June 23, 2008 to September 12, 2008
Notice 2008-4
Institute of International Bankers
Multistate Apportionment Update
Other States
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Colorado – Single Sales Factor 1/1/2009
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West Virginia – Combined filing World Wide Election
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Texas – Gross Receipts from Trading Activities
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UDITPA – Drafting Committee Meeting 5/20/08
Page 12
Institute of International Bankers
Institute of International Bankers
U.S. Taxation of International Banks
Current Developments in Multistate
Taxation
TAX
James K. Venere
KPMG LLP
June 25, 2008
ANY TAX ADVICE IN THIS COMMUNICATION IS NOT
INTENDED OR WRITTEN BY KPMG TO BE USED,
AND CANNOT BE USED, BY A CLIENT OR ANY
OTHER PERSON OR ENTITY FOR THE PURPOSE OF
(i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON
ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR
RECOMMENDING TO ANOTHER PARTY ANY
MATTERS ADDRESSED HEREIN.
The information contained herein is general in nature and based on authorities that are
subject to change. Applicability to specific situations is to be determined through
consultation with your tax adviser.
© 2008 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.
Printed in the U.S.A. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative.
INTERNAL USE ONLY. Not for distribution to clients unless the technical and policy review requirements of Tax Services Manual section 23.7 are satisfied.
14
DATED MATERIAL
THE MATERIAL CONTAINED IN THIS HANDOUT IS
CURRENT AS OF THE DATE PRODUCED. THE MATERIALS
HAVE NOT BEEN AND WILL NOT BE UPDATED TO
INCORPORATE ANY TECHNICAL CHANGES TO THE
CONTENT OR T0 REFLECT ANY MODIFICATIONS TO A TAX
SERVICE OFFERED SINCE THE PRODUCTION DATE. YOU
ARE RESPONSIBLE FOR VERIFYING WHETHER OR NOT
THERE HAVE BEEN ANY TECHNICAL CHANGES SINCE
THE PRODUCTION DATE AND WHETHER OR NOT THE
FIRM STILL APPROVES ANY TAX SERVICES OFFERED
FOR PRESENTATION TO CLIENTS. YOU SHOULD
CONSULT WITH WASHINGTON NATIONAL TAX AND RMTAX AS PART OF YOUR DUE DILIGENCE.
© 2008 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.
Printed in the U.S.A. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative.
INTERNAL USE ONLY. Not for distribution to clients unless the technical and policy review requirements of Tax Services Manual section 23.7 are satisfied.
15
Key Areas of Development
Legislative Roundup
Allocation & Apportionment
Nexus
Combined and Consolidated
Reporting
P.L. 86-272
Expense Disallowance
Provisions & Related Party
Transactions
Franchise, Gross Receipts,
and Net Worth Taxes
Sales & Use Taxes
Tax Base, Deductions, &
Credits
© 2008 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.
Printed in the U.S.A. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative.
INTERNAL USE ONLY. Not for distribution to clients unless the technical and policy review requirements of Tax Services Manual section 23.7 are satisfied.
16
Legislative Roundup –
Illinois
17
Legislative Roundup – Illinois
Senate Bill 1544 signed August 16, 2007
Most provisions effective for tax years ending on or after
December 31, 2008
Senate Bill 783 signed January 14, 2008
Technical corrections to S.B. 1544
Tax Base
Addback required for dividends paid by a captive REIT
Effective for tax years beginning on or after December 31, 2008
Dividends-received deduction
Corporations allowed a DRD for dividends received from a
captive REIT
© 2008 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.
Printed in the U.S.A. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative.
INTERNAL USE ONLY. Not for distribution to clients unless the technical and policy review requirements of Tax Services Manual section 23.7 are satisfied.
18
Legislative Roundup – Illinois
Tax Base (cont.)
Expanded expense disallowance rules
Expands the interest and intangibles expenses and costs
addback provisions to include amounts paid to a person that
would be a member of the same unitary group but for the fact
that the person is required to use a different apportionment
formula
Previously, only payments made to certain 80/20 companies
required to be added back
Statutory exceptions apply
Expands addback provisions to include certain
insurance premiums
No exceptions for insurance premiums payments required to be
added back
© 2008 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.
Printed in the U.S.A. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative.
INTERNAL USE ONLY. Not for distribution to clients unless the technical and policy review requirements of Tax Services Manual section 23.7 are satisfied.
19
Legislative Roundup – Illinois
Apportionment
Market-based sourcing rules adopted, revised in S.B.
783
Under S.B. 783, services are in Illinois if received in state
Services provided to a corporation, partnership or trust may only be
attributed to a state where it has a “fixed place of business”
If no fixed place of business or state where services received not
determinable, services deemed received at customer location where
services were ordered
If ordering office not determinable, services deemed received at
customer billing location
If taxpayer not taxable in state where services received, receipts
excluded from sales factor
© 2008 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.
Printed in the U.S.A. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative.
INTERNAL USE ONLY. Not for distribution to clients unless the technical and policy review requirements of Tax Services Manual section 23.7 are satisfied.
20
Legislative Roundup – Illinois
Apportionment (cont.)
Special rules for financial organizations, transportation
companies, telecommunications
Miscellaneous provisions
Department may permit use of alternative
apportionment formula without taxpayer having to file
formal petition
Partnerships, S corporations, and trusts required to
withhold on behalf of nonresidents
© 2008 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.
Printed in the U.S.A. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative.
INTERNAL USE ONLY. Not for distribution to clients unless the technical and policy review requirements of Tax Services Manual section 23.7 are satisfied.
21
Legislative Roundup Maryland
22
Legislative Roundup – Maryland
Senate Bill 444 (signed 4/24/2008)
Revises corporate reporting requirements enacted last
year
Under revised requirements, Maryland corporate
taxpayers that are members of a “corporate group” are
required to provide
A pro forma water’s edge return
A statement disclosing the sales factor and difference in
Maryland tax that would apply if Maryland (1) had a throwback
rule, and (2) assigned sales to the federal government
originating in state to Maryland
The amount and source of any nonapportionable income
identified on any state return
© 2008 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.
Printed in the U.S.A. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative.
INTERNAL USE ONLY. Not for distribution to clients unless the technical and policy review requirements of Tax Services Manual section 23.7 are satisfied.
23
Legislative Roundup – Maryland
Senate Bill 444 (signed 4/24/2008)
Statements must be filed annually for all tax years
beginning after December 31, 2005
Previously, the Comptroller issued guidance providing that for
2007 taxpayers were required to file a statement of intent to
comply until guidance was issued
Statements made under oath, subject to audit
Comptroller charged with developing oversight system
and to adopt regulations
Senate Bill 46 (signed 4/8/2008)
Repealed computer services tax
© 2008 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.
Printed in the U.S.A. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative.
INTERNAL USE ONLY. Not for distribution to clients unless the technical and policy review requirements of Tax Services Manual section 23.7 are satisfied.
24
Legislative Roundup –
Michigan
25
Legislative Roundup – Michigan
Signed into law July 12, 2007
The “Michigan Business Tax” ( or “MBT”) applies to all
business activity after December 31, 2007
The MBT replaces the SBT with several tax regimes:
a business income tax (BIT)
a modified gross receipts tax (GRT)
a premiums tax imposed on insurance companies, and
a capital-based franchise tax imposed on financial institutions
© 2008 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.
Printed in the U.S.A. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative.
INTERNAL USE ONLY. Not for distribution to clients unless the technical and policy review requirements of Tax Services Manual section 23.7 are satisfied.
26
Summary Chart – Michigan Business Tax Act
Taxpayers
SBT
BIT
GRT
Franchise
Tax
All entities
All entities
except
insurance
companies
and
financials.
Exception
for
taxpayers
with less
than
$350,000 of
receipts
apportioned
to the state
All entities
except
insurance
companies
and
financials.
Exception
for
taxpayers
with less
than
$350,000 of
receipts
apportioned
to the state
Bank
holding
companies,
banks,
savings and
loans, and
their
subsidiaries
Premiums
Tax
Insurance
companies
authorized
under
Michigan
law
© 2008 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.
Printed in the U.S.A. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative.
INTERNAL USE ONLY. Not for distribution to clients unless the technical and policy review requirements of Tax Services Manual section 23.7 are satisfied.
27
Summary Chart – Michigan Business Tax Act
SBT
Nexus
“Business
Activity” in
state
BIT
GRT
Franchise
Tax
Premiums
Tax
Physical
presence for
1 day or
actively
soliciting
sales in
state and
$350,000 of
Michigan
receipts
Physical
presence for
1 day or
actively
soliciting
sales in
state and
$350,000 of
Michigan
receipts
Physical
presence for
1 day or
actively
soliciting
sales in
state and
$350,000 of
Michigan
receipts
Gross direct
premiums
written on
property or
risk located
in MI
© 2008 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.
Printed in the U.S.A. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative.
INTERNAL USE ONLY. Not for distribution to clients unless the technical and policy review requirements of Tax Services Manual section 23.7 are satisfied.
28
Summary Chart – Michigan Business Tax Act
SBT
BIT
GRT
Franchise
Tax
Premiums
Tax
Public
Law 86272
applies
No
Yes
No
No
No
Default
filing
method
Separate
returns
Unitary
Combined
Finnigan Rule
Unitary
Combined
Finnigan
Rule
Unitary
Combined
Finnigan
Rule
Separate
Returns
Tax
Base
Federal
taxable
income + state
modifications
Federal
taxable
income + state
modifications
Gross
receipts
less certain
purchases
Net capital
Gross
direct
premiums
© 2008 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.
Printed in the U.S.A. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative.
INTERNAL USE ONLY. Not for distribution to clients unless the technical and policy review requirements of Tax Services Manual section 23.7 are satisfied.
29
Summary Chart – Michigan Business Tax Act
SBT
BIT
GRT
Franchise
Tax
Premiums
Tax
Apportionment
92.5% sales,
3.75%
property,
3.75% payroll
Single sales
factor
Single
sales
factor
Single
gross
business
factor
Not
applicable
Rate of Tax
1.9% of SBT
base
4.95% of BIT
base
.80% of
modified
GRT base
0.235
percent of
net capital
1.25% of
gross direct
premiums
© 2008 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.
Printed in the U.S.A. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative.
INTERNAL USE ONLY. Not for distribution to clients unless the technical and policy review requirements of Tax Services Manual section 23.7 are satisfied.
30
Legislative Roundup – Michigan
FAS 109 mitigation provision (H.B. 5104)
Creates new deduction to offset the increased tax liability and
expense
Calculate book-tax difference
Equals difference between book basis of asset for period ending
7/12/07 and that asset’s tax basis on 7/12/07
Calculate for both BIT and GRT
If book-tax difference results in net deferred tax liability, deduct from
the BIT base certain percentages of the book-tax difference
2015-2019 – 4%
2020-2024 – 6%
2025-2029 – 10%
© 2008 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.
Printed in the U.S.A. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative.
INTERNAL USE ONLY. Not for distribution to clients unless the technical and policy review requirements of Tax Services Manual section 23.7 are satisfied.
31
Legislative Roundup – Michigan
House Bill 5198
Sales and use tax base expanded to include
enumerated personal and business services
REPEALED December 1, 2007
House Bill 5408
Surcharge imposed on a person’s MBT liability after
allocation and apportionment
For persons subject to the BIT and GRT rate is 21.99 percent
For persons subject to the financial institutions franchise tax the
rate is 27.7 percent
For tax years ending after 12/31/2008, the surcharge rate is 23.4
percent
© 2008 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.
Printed in the U.S.A. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative.
INTERNAL USE ONLY. Not for distribution to clients unless the technical and policy review requirements of Tax Services Manual section 23.7 are satisfied.
32
Legislative Roundup –
West Virginia
33
Legislative Roundup- West Virginia
Senate Bill 680 (signed 3/31/2008)
Changes generally effective for tax years beginning on or after
January 1, 2009
Incremental corporate income tax rate reduction
Default water’s edge combined reporting
Clarifies that certain OECD identified jurisdictions are “tax havens”
Unused NOLs earned during a tax year when the taxpayer filed a
consolidated return can be used to offset any member of taxpayer’s
controlled group
Insurance companies generally excluded from combined report
Business franchise tax phased-out for tax years beginning after
December 31, 2014
© 2008 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.
Printed in the U.S.A. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative.
INTERNAL USE ONLY. Not for distribution to clients unless the technical and policy review requirements of Tax Services Manual section 23.7 are satisfied.
34
Legislative Roundup- West Virginia
Senate Bill 680 (signed 3/31/2008)
Financial Organizations
Clarifies that for tax years beginning on or after January 1, 2009,
financial institutions commercially domiciled in West Virginia are
allowed to apportion their income
Creates a corporate net income tax credit for financial
organizations whose tax liability increases as a result of
combined reporting
Creates a credit for West Virginia commercially domiciled
financial organizations that acquire financial organization not
commercially domiciled in West Virginia
Credit is equal to 50 percent of the goodwill associated with the
acquisition recorded on the balance sheet of the acquiring
organization
© 2008 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.
Printed in the U.S.A. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative.
INTERNAL USE ONLY. Not for distribution to clients unless the technical and policy review requirements of Tax Services Manual section 23.7 are satisfied.
35
Legislative Roundup –
Captive REITs
36
Legislation- Captive REITs
State
Effective Date
DRD
IL
Tax Years on or after
12/31/2008
DRD allowed for
dividends received from a
Captive REIT
IN- Not for Financials
Tax Years on or after
12/31/2007
KY
2007
MD
2007
NY
2007
For bank and insurance
tax purposes, DRD being
phased out
NC
2007
DRD allowed for
dividends received from a
Captive REIT
RI
7/1/2007
WV
1/1/2009
© 2008 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.
Printed in the U.S.A. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative.
INTERNAL USE ONLY. Not for distribution to clients unless the technical and policy review requirements of Tax Services Manual section 23.7 are satisfied.
37
Legislative Roundup –
Other
38
Legislative Roundup – Other
Kentucky (signed 4/9/2008)
House Bill 258
Kentucky sales factor includes overall net gain from
each treasury function transaction in the tax period
Utah
Senate Bill 136 (signed 3/14/08)
For tax years beginning on or after January 1, 2009,
cost of performance rule eliminated
Generally, under the revised sourcing rules, receipts
from services will be sourced to Utah if the purchaser of
a service receives a greater benefit of the service in
Utah than in any other state
© 2008 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.
Printed in the U.S.A. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative.
INTERNAL USE ONLY. Not for distribution to clients unless the technical and policy review requirements of Tax Services Manual section 23.7 are satisfied.
39
Nexus – Intangibles
40
Nexus – Intangibles
Geoffrey (La. App. 2/8/08)
Court held intangible licensing company had nexus for
income and franchise tax purposes
Quill physical presence requirement applies only to
sales taxes
In other Louisiana cases, courts upheld imposition of
tax without physical presence
Other cases decided on Due Process Grounds, this case
involved a Commerce Clause challenge
Precedential
© 2008 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.
Printed in the U.S.A. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative.
INTERNAL USE ONLY. Not for distribution to clients unless the technical and policy review requirements of Tax Services Manual section 23.7 are satisfied.
41
Nexus – Intangibles
Geoffrey v. Commissioner of Revenue (Mass. App. Tax
Bd. 7/24/07)
Out-of-state corporation licensing intangibles to
Massachusetts customers subject to corporation excise
tax
Based on its holding in Capital One, the Board
concluded the physical presence requirement in Quill
applied only for sales tax purposes
Board concluded Geoffrey had substantial nexus with
Massachusetts
Geoffrey purposefully derived substantial economic gain from
the Massachusetts market
Earned $33 million from licensing intangibles in Massachusetts
© 2008 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.
Printed in the U.S.A. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative.
INTERNAL USE ONLY. Not for distribution to clients unless the technical and policy review requirements of Tax Services Manual section 23.7 are satisfied.
42
Nexus – Intangibles
LANCO (N.J. 2006), cert. denied 6/18/07
Court held intangible licensing company had nexus in
New Jersey
Affirmed Appellate Court Ruling
Quill not applicable to income taxes
“Simply put we do not believe that the Supreme Court
intended to create a universal physical presence
requirement for state taxation under the Commerce
Clause”
U.S. Supreme Court denied review June 18, 2007
© 2008 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.
Printed in the U.S.A. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative.
INTERNAL USE ONLY. Not for distribution to clients unless the technical and policy review requirements of Tax Services Manual section 23.7 are satisfied.
43
Nexus – Intangibles
Praxair v. Division of Taxation (N.J. Tax Ct. 6/18/07)
Court rejected taxpayer’s assertion that it was not liable for
corporate business tax for tax years before the doing business
regulation was amended in 1996 to include specifically include an
intangible holding company example
Taxpayer argued penalties and interest should not be applied
Court noted regulations merely clarify existing law and cannot
expand the law
Addition of regulation did not amend the applicability of the doing
business statute
Court also determined taxpayer did not have reasonable cause to
not file returns prior to 1996
Noted that a taxpayer employing a state tax counsel should have been
able to discern that Quill did not apply to its situation
© 2008 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.
Printed in the U.S.A. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative.
INTERNAL USE ONLY. Not for distribution to clients unless the technical and policy review requirements of Tax Services Manual section 23.7 are satisfied.
44
Attributional Nexus
45
Attributional Nexus
Graduate Supply House (Ala. Admin. Law Div. 11/20/07)
Out-of-state company required to collect and remit sales tax
Activities of third-party representatives in state attributed to
taxpayer
Matter of Reynolds (Cal. BOE 5/31/2007)
Out-of-state partnership required to collect California use
tax
Had business location in state because taxpayer stored property at
business location of another entity under same ownership
Other business was considered a representative of taxpayer
because it assembled products and arranged deliveries at
partnership’s request
Taxpayer had applied for California seller’s permit
© 2008 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.
Printed in the U.S.A. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative.
INTERNAL USE ONLY. Not for distribution to clients unless the technical and policy review requirements of Tax Services Manual section 23.7 are satisfied.
46
Attributional Nexus
barnesandnoble.com (Cal. Super. Ct. 10/11/07)
Bricks-and-mortar affiliate’s use of shopping bags
with pre-inserted coupons insufficient to create
nexus
FTB is appealing
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47
Nexus – Attribution, Other
48
Nexus – Attribution, Other
Asworth (Ky. Cir. Ct. 6/14/07, amended and restated
12/4/07)
Circuit Court overturned a Board of Tax Appeals holding
that a corporate partner did not have nexus based on
former physical presence nexus standard
Board failed to consider statute addressing filing of
returns by partnership that operated to impose tax when
corporate partner had no employees or property in state
Also, the court held that the taxpayer was entitled to
apportion using three-factor formula, rather than single
receipts factor
Opportunities limited to pre-2005 tax years
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49
Nexus – Attribution, Other
Missouri LR3885 (5/17/07)
Use of in-state distribution center does not create
sales and use or income tax nexus
Department rejected “flash nexus” theory based on
momentary ownership of property prior to title passing to
customer
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50
Nexus – Attribution, Other
DiBelardino et al. v. Dep’t of Taxation (Va. Cir. 6/22/07)
Virginia nonresident owner of an interest in an LLC
doing business in Virginia did not have nexus with
Virginia under Due Process or Commerce Clauses
Nonresident member owned “investment unit”
Had no other contacts with Virginia
Other members owning investment interests had nexus with
Virginia by virtue of owning an unrelated business in state
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51
Nexus – Attribution, Other
The Classic Talbot’s (Md. Tax Ct. 4/11/2008)
Intangible holding company subsidiary had nexus
based on activities of Parent
The subsidiary lacked economic substance; thus, its
activities should be viewed through the activities of its
parent
The Court also upheld the disallowance of the Parent’s
royalty payment deduction
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52
Nexus – Attribution, Other
Drugstore.com, Inc. v. Div. of Taxation (N.J. Tax Ct.)
Taxpayer operated drugstore.com from Washington
state
New Jersey asserted taxpayer required to collect New
Jersey tax on sales to customers in state
Taxpayer argued that it merely operated the Web site and that
an out-of-state subsidiary was the vendor of the merchandise
After examining all the facts and circumstances, the Tax
Court held that the taxpayer was the actual vendor of
the merchandise
“Sales” entity created to bolster the claim that the taxpayer was
merely the operator of a Web site and was not involved in
making sales at retail
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53
Nexus – Other
54
Economic Nexus
55
Economic Nexus
Capital One Bank and Capital One F.S.B. (Mass. App.
Tax Bd. 6/22/07)
Out-of-state credit card bank with no physical presence in
Massachusetts subject to Financial Institution Excise Tax (FIET)
ATB assumed taxpayers had no property, employees or agents
in state
Financial institution is presumed to be engaged in business and
subject to the FIET if it has a certain amount of transactions or
receipts attributed to Massachusetts customers
First, the ATB held that physical presence rule in Quill only
applied to sales and use taxes
Next, the ATB analyzed whether FIET was applied to an activity
with a substantial nexus with Massachusetts
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56
Economic Nexus
Capital One Bank and Capital One F.S.B. (cont.)
ATB concluded the taxpayer’s deliberate and targeted exploitation
of the Massachusetts economic marketplace constituted substantial
nexus
Taxpayers targeted Massachusetts customers through advertising
campaigns
Taxpayers used their intangible property (Capital One logo) in state
Taxpayers received hundreds of millions of dollars from Massachusetts
customers
Taxpayers used Massachusetts governmental infrastructure to collect
delinquent accounts
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57
Economic Nexus
Maine Tax Alert (February 2008)
Revenue Services Alert provides that it considers taxpayers with
economic nexus alone to be subject to Maine’s income tax laws
All open tax period are under review
New Hampshire
“Business Activity” definition amended to include having a
“substantial economic presence evidenced by a purposeful
direction of business toward the state examined in light of the
frequency, quantity, and systematic nature of a business
organization’s economic contacts with the state.”
Language adopted from MBNA opinion
Effective July 1, 2007
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58
Economic Nexus
MBNA (W. Va. 2006), cert. denied 6/18/07
No real or tangible personal property and no employees
located in West Virginia
Principal business issuing and servicing credit cards
Financial organization presumed to have nexus if it
solicits business with twenty or more persons in the
state or has gross receipts of at least $100,000
attributable to in-state sources per year
Physical presence requirement articulated in Quill only
applied for sales and use tax purposes
Proper test for determining whether substantial nexus
exists – “significant economic presence test”
U.S. Supreme Court denied review June 18, 2007
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59
Look-back
Massachusetts - Technical Information Release 08-4
Previously, a three-year look-back period applied for certain nonfiling
taxpayers that voluntarily came forward
In general, the Department applied a seven-year look-back period
Under TIR 08-4, intangible holding companies and financial
institutions that voluntarily come forward will not qualify for the
three-year period
Massachusetts statutes, as well as the Geoffrey and Capital One
cases, should have put taxpayers owning intangible property or having
in-state loan or lending activity in the Commonwealth on notice that
they are required to file Massachusetts returns
Five-year look-back period will apply to such corporations that
voluntarily come forward before September 30, 2008 and pay all taxes,
interest, and penalties due by December 31, 2008
Department not bound to apply seven-year period for taxpayers not
taking advantage of the five-year look-back
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60
P.L. 86-272 and Throwback
61
P.L. 86-272 and Throwback
Indiana Letter of Findings 05-0237
Taxpayer not subject to tax in other states so sales
thrown back to Indiana
No definitive evidence activities in other states exceeded Public
Law 86-272 protection
Did not provide copies of state income tax returns
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62
P.L. 86-272 and Throwback
Welch Packaging (Ind. Tax Ct. 11/13/07)
Michigan sales not required to be thrown back to Indiana
Single Business Tax a franchise tax for the privilege of doing business
in state
International Home Foods (Mich. 3/30/07)
Department of Treasury not estopped from retroactively applying
decision in Gillette
Gillette held that the Michigan Single Business Tax was not an income
tax to which P.L. 86-272 protection applied
Prior to Gillette, the Department had published a Revenue
Administrative Bulletin that P.L. 86-272 applied to the SBT
Revenue Administrative Bulletin not binding authority; only
interpretation of statutes
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63
P.L. 86-272 and Throwback
Matter of Disney Enterprises (N.Y. Ct. App. 3/25/08)
Receipts of non-nexus members of combined group
properly includable in New York receipts numerator
Inclusion of a non-nexus subsidiary’s income in the
apportionment formula was not akin to imposing a tax on the
subsidiary
Inclusion of income did not violate P.L. 86-272
For the purposes of P.L. 86-272, the unitary group should be viewed
as one “person”
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64
Expense Disallowance
65
Expense Disallowance
Narrower
Broader
Royalties
and
intangible related
interest
and
and
all intercompany other expenses
interest
North
Carolina
Oregon1
District of Columbia
Georgia
Indiana
Mississippi Michigan
New York
Rhode Island
Tennessee2
Virginia
Alabama
Kentucky3
Arkansas
South Carolina4
Connecticut
Illinois1
Maryland
Massachusetts
New Jersey
Ohio
NEW
1To recipient outside combined report
2For disclosure purposes only
3Management fees; but only intangible interest disallowed
4If accrued but not paid
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66
Related Party Transactions
67
Related Party Transactions
VFJ Ventures (Ala. Ct. App. 2/8/08)
Royalty payments to related party required to be added back
Court reversed trial court decision, which held that taxpayer qualified
for the “unreasonable” exception to the addback rules
Court held unreasonable exception applies when tax would be
“out of proportion” to taxpayer’s presence in Alabama
Department asserted economic substance and a business purpose
for the payments were irrelevant
Regulation adopted after tax year at issue was consistent with the
Department’s interpretation
Department already has power to disallow sham transactions
Taxpayer’s interpretation inconsistent with another addback
exception
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68
Related Party Transactions
VFJ Ventures, Inc. (cont.)
The court next held the “subject to tax” exception did not
apply to the taxpayer
IMCOs had apportioned 2.8783% and 3.9415% of their income
to North Carolina – did not file in any other states
Exception only applies to the portion of the IMCO’s income
actually apportioned to other states
Finally, the court rejected the taxpayer’s arguments that
the addback statute was unconstitutional
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69
Related Party Transactions
Virginia Policy Document 07-153 (10/2/07)
Addresses the application of the “subject to tax” exception to the
expense disallowance rules
Exception applies to any portion of the intangible expenses and costs
when the corresponding item of income received by the related
member is subject to a net income tax in another state
Taxpayer claimed an exception for 100 percent of the royalty
payments made to Parent
Parent’s apportionment factors in the states where it paid tax were
under 3 percent
Department limited exception to the addback to the portion of the
royalty payments that correspond to the portion of the Parent’s postapportionment income in other states
Department also rejected constitutional challenge to the addback
statute
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70
Related Party Transactions
Family Dollar Stores of Ohio, Inc. v. Wilkins (Ohio Bd.
Tax App. 1/4/08)
Taxpayer was part of a group of corporations doing
business in 40 states
Taxpayer entered into trademark and service mark licensing
agreement with an affiliate
Added back licensing fees paid to affiliate in computing Ohio
taxable income
Later, taxpayer argued that it qualified for the “subject to
tax” exception to the addback rules
Applies for that portion of the intangible or interest expense that
is actually allocated and apportioned to “other states” that
imposes a tax on, or measured by, income
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71
Related Party Transactions
Family Dollar Stores of Ohio, Inc. v. Wilkins (cont.)
Does “other states” exclude those states where the
taxpayer could have filed or files combined or
consolidated, regardless of whether intercompany
transactions are eliminated as part of the
combined/consolidated filing?
Yes
Taxpayer and the marketing corporation could have filed on a
combined or consolidated basis in Massachusetts and South
Carolina
Thus, taxpayer did not meet the exception to the addback rules
even though intercompany transactions were not eliminated in
those states
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72
Tax Base
73
Tax Base – Net Operating Losses
Golden West Financial (Fla. Dist. App. 2/19/08)
Court held SRLY rule invalid exercise of delegated legislative
authority
Indiana LOF No. 06-0441 (12/5/07)
Only common parent of a consolidated group may carry back NOLs
to separate return years
Maryland Code Regs. 03.04.03.07 (amended 10/22/07)
An NOL generated when a corporation is not subject to Maryland
income tax may not be allowed as a deduction to offset Maryland
income
Matter of Univisa (NY DTA 9/20/07)
Federal election to reattribute NOLs generated by a subsidiary not
allowed when taxpayer filed separately in New York
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74
Tax Base – Net Operating Losses
Revenue Ruling No. 07-14 (Tenn.) (5/3/07)
Taxpayer may not use NOL carryforwards generated by
an affiliate that has dissolved, merged into the parent,
converted to a disregarded SMLLC owned by the
taxpayer, or undergone an F reorganization
P.D. 07-120 (Va.) (7/31/07)
Successor corporation entitled to use acquired
corporation’s NOL deductions for Virginia tax purposes
No requirement that acquired corporation had to have business
activity in Virginia
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75
Credits
76
Credits
Exelon Corp. v. Ill. Dep’t of Revenue (Ill. App. 9/24/07)
Taxpayer not entitled to Investment Tax Credit (ITC) for
property used to generate electricity for retail sale
Illinois law provides an ITC for investments in property used by
an Illinois taxpayer primarily engaged in manufacturing, mining
certain minerals, or retailing
Retailing includes sale of tangible personal property
Taxpayer claimed an ITC for investing in property used
in generating, transmitting and distributing electricity for
retail sale
Court held electricity does not constitute tangible
personal property
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77
Credits
Gillette Co. v. Commissioner of Revenue (Mass. App.
Tax Bd. 9/28/07)
Liquidation of subsidiary into parent in a tax-free IRC
§332 liquidation was not a disposition of assets
resulting in a recapture of Investment Tax Credits
Board determined there was no disposition
No transfer to a third party
No change in control of assets outside parent/subsidiary
relationship
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78
Credits
Astoria Financial Corp. (N.Y. App. Tax Trib. 11/21/07)
Loans originated and held for investment did not count
in determining whether a taxpayer qualified for an ITC
ITC was for property principally used in taxpayer’s business as a
broker or dealer in securities
Taxpayer was not a broker or dealer with respect to loans held
for investment and not sold
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79
Allocation and Apportionment
80
Allocation and Apportionment
Allocable or apportionable?
Tate and Lyle Americas, Inc. (Ala. Admin. Law Div.
1/15/08)
ALJ held there was no unitary relationship between the entities
Being in the same line of business was only one factor
No functional integration, centralized management, or economies of
scale
Next, ALJ held the taxpayer’s investment in the subsidiary did
not serve an operational function
Taxpayer did not invest in subsidiary to generate working capital or
for supply purposes
Accordingly, gain from sale of subsidiary stock not apportionable
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81
Allocation and Apportionment
Allocable or apportionable?
Kimberly Clark (Ala. Ct. Civ. App. 3/21/08)
Paper products manufacturer’s sale of mill and timberland
produced business income
Taxpayer was in the business of buying and selling paper mills
and tracts of Timberland
McKesson v. Division (N.J. Tax Ct. 8/13/07)
Gain from deemed asset sale nonoperational (nonbusiness)
income
New Jersey law only incorporates the “functional test”
Requires that acquisition, management, and disposition must all be
integral to the taxpayer’s business operations
Sale was an extraordinary event, proceeds were distributed to
parent, no operational function continued after sale and parent
did not reinvest proceeds in similar business
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82
Allocation and Apportionment
Allocable or apportionable?
MeadWestvaco (U.S. Sup. Ct. 4/15/07)
Illinois appellate court held income from sale of Lexis was
apportionable based on the operational vs. investment function test
Did not address trial court’s finding that Mead and Lexis were not unitary
U.S. Supreme Court held state court erred in using the operational vs.
investment function test after determining that Mead and Lexis were not
unitary
Apportionment may be permissible when asset generating the
income is unitary with the taxpayer’s business
Where the asset at issue is a business, the “hallmarks” of a unitary
business should be applied (i.e. functional integration, centralized
management, economies of scale), not operational test
No guidance provided on what is a “business”
Remanded to Illinois appellate court to determine whether Mead
and Lexis were engaged in a unitary business
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83
Allocation and Apportionment
Allocable or apportionable?
Secretary of Revenue Decision, No. 2006-111 (N.C.)
(4/19/07)
Proceeds from lawsuit settlement apportionable business
income under functional and transactional tests
Secretary of Revenue Decision, No. 2007-28 (N.C.)
(9/14/07)
Out-of-state holding company’s distributive share of a North
Carolina LLC was apportionable business income
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84
Allocation and Apportionment
Sales factor sourcing-other than tangible property
New Jersey
Regulation clarified – trademark receipts sourced based on
licensee’s pro rata use in state according to its sales factor
Oregon
Regulation clarifies direct costs do not include costs not part of
income producing activity, such as accounting or billing costs
P.D. 07-121 (Va.) (7/31/07)
Franchise fees were not sales of tangible personal property
sourced to the destination state for sales factor purposes
Although some tangible property was transferred to the
franchisees, the main purpose of the transaction was for the
franchisor to provide services to the franchisee
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85
Allocation and Apportionment
Sales factor sourcing-other than tangible property
(cont.)
Ameritech Publishing (Wisc. Tax App. Comm. 8/22/06)
All of the taxpayer’s income producing activities with respect to
sales of telephone directory advertising occurred in Wisconsin
because directories were received in state
A number of activities – solicitation, creation, development, and
design – were performed out-of-state
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86
Allocation and Apportionment
Single factor apportionment
New York A.4310 – fully phased-in beginning in 2007
Maine L.D. 499- effective January 1, 2007
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87
Allocation and Apportionment
Special industry formulas
Fedex Ground Packaging Sys. (Pa. 12/27/07)
Numerator = Taxpayer’s average receipts per mile for
transporting property in Pennsylvania X the miles driven in
Pennsylvania
Court held taxpayer not required to use miles driven everywhere
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88
Allocation and Apportionment
Right to apportion
Lehman Brothers (Del. 11/7/07)
Statute apportioning 100 percent of a bank’s income to
Delaware did not violate the fair apportionment prong of
Complete Auto
Delaware’s apportionment system reasonably reflected the instate component of the bank’s activity
U.S. Supreme Court denied cert April 28, 2008
© 2008 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.
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89
Combined and Consolidated
Returns
90
Combined and Consolidated Returns
RR Donnelly & Sons (Az. Tax Ct. 6/29/07)
Corporation and its subsidiary trademark holding
company were unitary
Transactions between the entities could not be valued
at arm’s length
Letter of Findings 06-0310 (Ind.) (5/23/07)
Corporate limited partner not unitary with limited
partnership
Taxpayer failed to prove that extraordinary integration
existed for there to be a unitary relationship
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91
Combined and Consolidated Returns
Wal-Mart Stores East, Inc. v. Hinton (N.C. Super. Ct. 12/31/07)
Secretary of Revenue forcibly combined taxpayer, holding
company, and a REIT
Assessed $30 million in taxes, interest, and fees
Taxpayer argued that the Secretary could not forcibly combine the
parties unless there were transactions in excess of fair compensation
Court held that the Secretary was permitted to force combination
Statutory support for authority to combine the entities
Taxpayer’s return did not reflect its true earnings
No economic impact of reorganization other than tax savings
Understatement penalties applied regardless of whether taxpayer
was negligent
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92
Combined and Consolidated Returns
Talbot’s (N.Y. DTA 3/22/07)
Forced combination of company and royalty subsidiary upheld
Although royalty payments were arm’s length, ALJ held there was
no business purpose or economic substance for use of royalty
company to hold trademarks
Not precedential
Kellwood (N.Y, DTA 3/27/2008)
Forced combination of related corporations was proper because
transactions, not corporations, lacked “economic substance”
ALJ looked to whether a “reasonable possibility of profit existed apart
from tax benefits”
Prudent investor would not have entered into transactions
Not precedential
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93
Combined and Consolidated Returns
Matter of American Banknote (N.Y. DTA 5/30/07)
Holding companies were not engaged in unitary
business with operating entities
Premier Bancorp (N.Y. Tax App. Trib. 8/2/07)
Division could not force combination of grandfathered 9A banking subsidiary and its Article 32 parent
Legislature specifically blessed use of grandfathered 9-A
corporations
Parent’s transactions with subsidiary had valid business purpose
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94
Combined and Consolidated Returns
Matter of Hallmark (N.Y. Tax App. Trib. 7/19/07)
Sales company not required to file combined with manufacturer
Contemporaneous pricing study prepared in accordance with IRC
§482 regulations overcame presumption of distortion
Cannot be appealed by the state
Virginia P.D. 07-155 (10/4/07)
Policy change allows certain merged entities will be allowed to
choose either the acquiring or the target group’s filing method
Previously, group had to adhere to method of the acquiring corporation
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95
Business Purpose /
Sham Transaction Doctrine
96
Business Purpose/ Sham Transaction
Doctrine
TJX Companies, Inc. (Mass. App. Tax Bd. 8/15/07)
Transactions involving the transfer and licensing back of intangibles
lacked valid business purpose
Were properly disregarded under the sham transaction doctrine
Fleet Funding (Mass. App. Tax Bd. 2/21/08)
Transactions involving use of REITS to shield interest income from
taxation disregarded under the sham transaction doctrine
TD Banknorth, NA (Vt. Super. 3/07)
Court upheld collapse of investment companies and banks
Investment companies lacked economic substance and had no
valid business purpose
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97
Pass Through Entities
98
Pass Through Entities
Northwest Energetic (Cal. App. 1/31/08)
Annual LLC fee ruled unconstitutional
Levy was a tax not a fee
Imposed on total income without apportionment;
thus, violated constitutional fair apportionment
requirement
Precedential
Court held only the portion of the fee that exceeds
the Commerce Clause limits must be refunded
However, Northwest Energetic had no California activities so
entire amount must be refunded
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99
Pass Through Entities
Ventas Finance I (Cal. Super. 11/7/06)
Second court held LLC fee unconstitutional
Unlike Northwest Energetic, taxpayer did perform some
business activities in California
Court also held not possible to reform statute by adding
apportionment mechanism
Only permissible to reform statute when consistent with
legislative intent
Legislature had considered and rejected adding apportionment
mechanism to statute
Not precedential
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100
Pass Through Entities
Riverboat Development, Inc. v. Ind. Dep’t of State
Revenue (Ind. Tax Ct.)
S Corporation not required to withhold on income
derived from interest in an LLC doing business in
Indiana
Nonresident withholding only required on “adjusted gross
income derived from sources in Indiana”
Income at issue not derived from sources in Indiana
LLC interest considered intangible property
Income from intangible property derived from Indiana sources if
the taxpayer’s commercial domicile is in Indiana
Because the S corporation was domiciled outside
Indiana, the LLC income was not considered from
sources within Indiana
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101
Sales and Use Taxes –
Software, Digital Goods
102
Sales and Use Taxes – Software, Digital
Goods
Alabama – Smith v. Dept. of Revenue (11/17/06)
Photographs delivered electronically constitute sale of tangible
personal property subject to sales tax
Colorado – SR 7 (5/30/06)
Software will only be subject to tax if it is:
Prepackaged
The use is governed by a non-negotiable license agreement
Delivered in tangible medium
Georgia – Ga. Reg. 560-12-2-.111 (adopted 7/2/06)
Electronically delivered software and custom software not subject
to tax
Illinois – ST 06-0071-GIL (4/19/06)
Downloaded videos not subject to sales and use tax
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103
Sales and Use Taxes – Software, Digital
Goods
Kansas – P-2007-006 (12/20/07)
Lease of electronically delivered email mailing list not subject to
sales tax if no hard copy transferred
Massachusetts – 830 CMR 64H.1.3 (amended 4/1/06)
Definition of tangible personal property includes all standardized
computer software, regardless of method of delivery
Missouri – LR3759 (5/3/07)
Charges to customize canned software purchased and installed by
a taxpayer on behalf of a client subject to sales tax
Charges for custom work on software purchased by the client and
installed by the taxpayer under a separate contract or purchased
and installed by the client not taxable
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104
Sales and Use Taxes – Software, Digital
Goods
New York – TSB-A-07(11)S (4/12/07)
Videos delivered electronically not subject to sales and
use tax
New York – TSB-A-07(14)S (5/17/07)
Sales of alphanumeric codes used to download audio
files not subject to sales tax, regardless of whether
delivered via tangible medium
Sales of music paid for by i-tunes card not subject to
sales tax
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105
Sales and Use Taxes – Software, Digital
Goods
Dechert LLP ( Pa. Cmmw. 1/23/08)
Prewritten computer software is tangible personal
property subject to sales and use tax, regardless of
method of delivery
Affirmed Graham Packaging
Texas
Software installed on a server outside of Texas not
subject to sales tax
However, subject to use tax when software used in
Texas
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106
Sales and Use Taxes – Software, Digital
Goods
P.D. 06-103 (Va.) (10/5/06)
Software delivered over the Internet not subject to tax
P.D. 07-22 (Va.) (3/27/07)
Receipts from licensing canned software subject to
sales tax
Sales agreement did not expressly provide for electronic
delivery of the software
Did not provide that no tangible personal property would be
transferred to the customer
Thus, receipts were taxable, regardless of whether any
tangible personal property actually transferred to
customer
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107
Sales and Use Taxes –
Software Maintenance
Agreements
108
Sales and Use Taxes – Software Maintenance
Agreements
Dell, Inc. v. Superior Court (Cal. App. 1/31/08)
Service contracts sold with computers for one lump-sum
price not subject to sales tax
Issue – Is this a “bundled transaction” or a “mixed
transaction”?
Court held this was not a “bundled transaction”
The goods and service were not intertwined
Instead, was a “mixed transaction”
Both service and computer are significant aspects of the transaction
and are readily separable
Service contract charges not required to be separately
stated
© 2008 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.
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109
Sales and Use Taxes – Software Maintenance
Agreements
Indiana – Letter of Findings 05-0438 (11/06)
Revised policy regarding taxability of software
maintenance agreements
Previously, agreements taxable only if guaranteed
taxpayer would receive tangible personal property in
form of software updates as part of agreement
Prewritten computer software is tangible personal property
regardless of method of delivery
Now, presumed taxpayer will receive periodic software
updates
Thus, agreements presumed subject to tax
Taxpayers can rebut presumption by showing that no updates
were received
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110
Sales and Use Taxes –
Other Exemptions
111
Sales and Use Taxes – Other Exemptions
Advertising
Matter of Yellow Book (N.Y. DTA 2/26/07)
Telephone directories were promotional materials; however, did
not meet criteria for exemption because delivered to customers
by private delivery companies, not common carriers
Rolling Stock
Alvan Motor Freight (Mich. Tax. Trib. 2/7/07)
Interstate motor carrier not entitled to use tax exemption for
rolling stock used in interstate commerce
Illinois UT 07-4 (7/13/07)
Lessor did not qualify for exemption for use tax on an aircraft
purchased in Alabama and subsequently brought into Illinois
© 2008 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.
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112
Sales and Use Taxes –
True Object Test
113
Sales and Use Taxes – True Object Test
Intersections, Inc. (Va. Cir. 11/8/06)
Taxpayer not liable for use tax on fees paid for the
licensing of tangible software
Software allowed taxpayer to access servers to perform credit
monitoring services
Court applied “true object” test; held taxpayer’s
motivation was to access servers to obtain data- an
exempt service
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114
Sales and Use Taxes – True Object Test
Qualcomm v. Chumley (Tenn. App. 9/26/07)
Court of Appeals held that a vehicle tracking service
was not a taxable telecommunications service
Service allowed vehicle drivers to send text messages to and
from fleet command centers
Court applied the “true object” test to determine whether
primary purpose of the service was to
furnish a taxable telecommunications services
Held that true object was to determine vehicle locations
Ability to transmit text messages was only a part of the overall
service
Did not replace cell phones as primary means of communications
© 2008 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.
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115
Sales and Use Taxes –
Taxability
116
Sales and Use Taxes – Taxability
Boyd Bros. (Ala. Ct. Civ. App. 6/22/07)
Use tax not due on trucks and trailers used in interstate commerce
and subsequently brought into Alabama for use
Sales tax would not have applied if original purchase occurred in
Alabama
There was no evidence trucks purchased for use in Alabama
Imposition of use tax would violate Commerce Clause because tax not
apportioned based on miles traveled in state
U.S. Bancorp (Ala. Admin. Law Div. 12/13/07)
Contracts were lease transactions subject to Alabama rental tax,
not conditional sales
At the time of the agreement, the customer had the right to return
the property at the end of the contract period
© 2008 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.
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117
Sales and Use Taxes – Taxability
National Film Laboratories (Ca. App. 10/4/07)
Sales of videocassette tapes ultimately bound for the U.K. not
exempt as export sales
Tape vendor delivered tapes to California company that performed
quality control functions and then shipped the tapes to the
purchaser in the U.K.
Court held that tapes did not enter the stream of export when
delivered to quality control corporation
Accordingly, sales were subject to California sales tax
Firestone Polymers (La. App. 10/31/07)
Taxpayer’s lease of shipping containers was subject to municipal
lease tax because the containers came to rest temporarily in the
municipality
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118
Sales and Use Taxes – Taxability
DaimlerChrysler (Ohio Bd. Tax App.) (appealed)
Manufacturer, not dealer, subject to use tax on “goodwill” repair
parts
Spectrum Arena (Pa. Cmmw. 3/7/07)
Separately stated charges for distribution and transmission of
electricity subject to sales tax
P.D. 06-139 (Va.) (10/24/06)
Service fees collected by company acting as intermediary between
hotel owners and guests not subject to sales tax
River City Refuse (Wis. 3/8/07)
Intercompany transfers not subject to use tax; no consideration was
exchanged and entities transferring assets lacked mercantile intent
Legislatively overturned
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119
Sales and Use Taxes –
Bad Debt / Refunds
120
Sales and Use Taxes – Bad Debt / Refunds
DaimlerChrysler (Conn. 12/18/07)
Vehicle manufacturer not entitled to refund of sales taxes paid back
to customers who returned cars pursuant to state’s lemon law
DaimlerChrysler (La. App. 9/14/07)
Vehicle financing entity not entitled to a bad debt deduction
DaimlerChrysler (Mass. ATB 4/12/07)
Vehicle manufacturer not entitled to refund of sales taxes paid back
to customers who returned cars pursuant to state’s lemon law
DaimlerChrysler (N.Y. DTA 2/1/07)
Vehicle manufacturer not entitled to refund of sales taxes paid
when it purchased replacement vehicles for customers pursuant to
lemon law
© 2008 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.
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121
Sales and Use Taxes – Bad Debt / Refunds
DaimlerChrysler (Mich. Ct. App. 7/25/06)
Vehicle finance company entitled to bad debt deduction
Legislatively overturned
DaimlerChrysler (Wis. Ct. App. 11/22/06)
Vehicle finance company not entitled to a bad debt
deduction
DaimlerChrysler (Tenn. App. 4/24/07)
Vehicle manufacturer not entitled to trade-in credit
allowed dealers to reduce use tax liability on vehicles
removed from inventory for business use
© 2008 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.
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122
Sales and Use Taxes – Bad Debts / Refunds
CitiFinancial (Ark. 1/17/08)
Bank was not a “taxpayer” entitled to a refund of sales taxes paid
on defaulted customer accounts written off as bad debts for federal
income tax purposes
Home Depot (N.J. Tax Ct. 3/14/08)
Vendor not entitled to a refund of sales taxes paid on defaulted
customer accounts
Matter of Home Depot (N.Y. DTA 5/17/07)
Vendor not entitled to a refund of sales taxes paid on purchases
made with private label credit cards that later became uncollectible
© 2008 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.
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123
Sales and Use Taxes – Bad Debts / Refunds
Household Retail Services (Mass. 1/16/07)
Financial services company not entitled to
reimbursement of sales taxes for accounts written off as
bad debts
Issue was whether company was “vendor” entitled to
bad debt deduction
Statute provided that vendors were those who sold tangible
personal property at retail which included assignees
Company argued as assignee on accounts it was entitled to all
the rights of vendor
Court disagreed; company was not engaged in the
selling of tangible personal property at retail
© 2008 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.
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124
James K. Venere
KPMG LLP
973-912-6349
jvenere@kpmg.com
www.kpmg.com
125
New York/New Jersey Bank
Tax Update
James W. Wetzler
Tax Director
Deloitte Tax LLP
June 25, 2008
NYS Budget—REIT/RIC’s
 Prior Article 32 REIT/RIC provisions, which involved elimination of
dividends received deduction, have been replaced by combined
reporting requirement.
 Captive REIT/RICs must be combined with controlling shareholder or
“closest controlling shareholder” that is either a NY taxpayer or part of a
combined group with a NY taxpayer. §2.7-10.
– Captive REIT/RIC defined based on 50%+ direct or indirect ownership by a
single corporation
– Exclusion for publicly traded REIT/RIC’s as well as REIT/RIC stock held in
life insurance segregated asset accounts
 Dividends paid deduction eliminated in Article 9-A combined return.
§211.4(b)(1)(ii)
 For banks, dividends paid deduction phased out in combined return.
§1462(f)(3)(ii).
– 50% in 2008
– 75% in 2009-10
Copyright © 2008 Deloitte Development LLC. All rights reserved.
– 0% thereafter
127
NYS Budget—REIT/RIC’s (con’t)
 Captive REIT/RIC’s taxed under Articles 9-A, 32 or 33 based on the
Article under which their controlling shareholder or “closest controlling
shareholder” is taxed. §209.4,209.5, 209.7.
 “Closest controlling shareholder” is the corporation in the ownership
chain that is nearest to the captive REIT/RIC and is either a NY taxpayer
or part of a NY combined group, not including corporations that are
statutorily prohibited from being included in a combined report.
§211.4(a)(6).
 Qualified REIT subs included in combined report with captive REIT.
 Mandatory combined reporting also applies to captive REIT/RIC’s that
engage in substantial intercorporate transactions with commonly
controlled affiliates or engage in distortive intercompany arrangements.
 Article 32 dividends received deduction increased to 100% for dividends
from a captive REIT/RIC included in a combined return. §1453(e)(18).
Copyright © 2008 Deloitte Development LLC. All rights reserved.
128
NYS Budget—REIT’s/RIC’s (con’t)
 Exemption for REIT/RIC’s owned by small banks.
§1462(f)(2)(v)(G).
– Affiliated group must not engage in any non-de minimis
business that a bank holding company subsidiary cannot
legally engage in.
– Affiliated group assets cannot exceed $8 billion.
 These captive REIT/RIC’s are taxed under Article 9A.
Copyright © 2008 Deloitte Development LLC. All rights reserved.
129
NYS Budget—Credit Card Banks
 Economic nexus for credit card banks
– Treated as doing business in NY if number of card holders or merchants or
revenue from card holders or merchants exceeds a de minimis amount.
§1451(c)(1)
 1,000 or more NY holders and/or merchant locations
 $1 million or more receipts from NY cardholders and/or merchant locations
 Banks who are treated as doing business in NY solely on account of
economic nexus rule are presumed not combined with NY Article 32
group (ie, unless combination is necessary to reduce distortion).
§1462(f)(2)(v)
– Transition rule for credit card banks already part of combined returns—onetime election to remain combined. Can only be revoked with consent of
Commissioner
– Credit card banks are presumed combined with other commonly controlled
non-taxpayers who perform services for them.
 Does not apply for NYC. Applies to MTA surcharge if cardholders or
merchants are in NYC Metro area. TSB-M-08(7)C.
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 Sourcing clarified to refer to cardholder billing address. §1454(a)(2)(D)
NYS Budget—Miscellaneous
 Mandatory 1st estimated tax installment increased
from 25% to 30%.
 Article 9-A capital tax for non-manufacturers raised
from $1 million to $10 million for 3 years. Rate
reduced.
 Financial services ITC extended for 3 years.
 Program for mandatory e-filing of business returns
 VDA program formalized
 VCI program re-opened
 Sales tax re-registration
 Mandatory electronic filing
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131
NYS Cases—Disney
 In the Matter of Disney Enterprises, Inc., et al,
3/24/08 addressed whether NY was a “Joyce” or a
“Finnigan” state under Article 9-A. NYS Court of
Appeals held that NY is a Finnigan state. Sales of
non-taxpayers included in numerator of receipts
factor.
 Court’s (controversial) reasoning was that the term
“taxpayer” in P.L. 86-272 referred to the unitary
business, not the specific taxpayer doing business
in the state.
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132
NYS Cases—Bausch & Lomb
 NY Article 9-A exempts dividends, interest, and
gains from “subsidiary capital.” Denies deduction
for losses from subsidiary capital. Adds back
expenses attributable to subsidiary capital.
 Matter of Bausch & Lomb, NYS Tax Appeals
Tribunal, 12/20/07 presented the issue of whether
the taxpayer could deduct a loss from sale of a
subsidiary that was part of the combined group.
Based on its reading of the statute, the Tribunal
held that stock in a combined subsidiary was not
subsidiary capital so that the taxpayer could deduct
the loss.
 The NYS tax department presented its
(controversial) interpretation of the decision in TSBM-08(3)C.
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– Decision to apply retroactively.
133
NYS Cases—Premier National
 Matter of Premier National Bancorp, DTA# 819746,
8/2/07
– Tax department could not use discretionary authority to
unwind establishment of an investment company to take
advantage of NY investment capital tax benefits.
– Implications for application of economic
substance/business purpose/sham transaction doctrines
in NY.
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134
NYS Cases—Emigrant Bancorp
 In Matter of Emigrant Bancorp Inc., DTA# 820059,
7/19/07, the Tribunal overruled an ALJ decision on
the calculation of the bad debt reserve deduction.
 In 1986, Congress scaled back the thrift bad debt
deduction (IRC §291); NYS decoupled. However,
the statutory language created some potential
anomalies in the way the deduction was computed.
 The Tribunal ruled that the literal statutory language
controlled; i.e., that the taxpayer could not use
“common sense” to correct what it perceived to be
anomalies.
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135
NYS Cases—Astoria Financial
 In Matter of Astoria Financial Corporation, DTA #
820197, 11/21/2007, the Tax Appeals Tribunal
appeared to adopt a broad interpretation of the
financial services investment tax credit.
– In NYT-G-07(4)C, the NYS Tax Dept. had opined on what activities
qualify for the financial services investment tax credit (ITC).
 Analyzed financial services ITC using logic applied to manufacturing ITC;
i.e., qualifying property must directly support purchasing and selling of
securities.
 Some specific conclusions—
– Mortgage securitization activity qualifies; origination does not.
– Financial advice in connection with investment banking (including M&A) does
not qualify
– Most e-trading activities do not qualify, nor does technology development to
facilitate prime brokerage order execution
– Trade processing and clearing qualify, as does payment processing; other 136
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back-office activities generally do not qualify.
New York Cases—Astoria Financial
(con’t)
 The Tax Appeals Tribunal, while ruling against the
taxpayer, rejected the logic of the NYT-G. It stated
the rule as follows:
“Thus, if the business was predominantly that of a broker
or dealer, all property principally used in that business
would qualify, regardless of whether the isolated activity
in which it was used could be characterized as a broker
or dealer activity. If however, broker and dealer activities
were merely ancillary or subordinate features of the
business, the property would not qualify, even if it were
used in those activities.”
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137
NYS Cases—Astoria Financial (con’t)
 The case also addressed the computation of the
asset tax under Article 32.
 The Tribunal held that the taxpayer properly
excluded goodwill and deferred tax assets from the
computation of the asset tax on the grounds that
they were not used to produce entire net income.
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138
NYS Cases--Kellwood
 In the Matter of Kellwood Company, NYS Division
of Tax Appeals, ALJ Unit, 3/27/08, addressed
whether NY can force combined reporting of a
subsidiary that has economic substance (i.e.,
conducts economic activity with its own employees)
but lacks business purpose, regardless of whether
intercompany pricing was arm’s-length.
 ALJ held in favor of the tax department in upholding
forced combination.
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139
NYC Statement of Audit Procedure
 In Matter of Park Avenue Bank N.A., TAT(E)9993(BT), 8/06/03, the NYC Tax Appeals Tribunal
held that the Dept of Finance failed to establish that
it made an appropriate discretionary adjustment to
the Bank Tax apportionment formula when it tried,
in effect, to unwind the fact that the statute does not
provide for an “eligible funding” adjustment to the
receipts factor for IBFs when taxpayers elect the
formula method for claiming the IBF benefit.
 The Statement of Audit procedure instructs auditors
not to attempt such an adjustment if the “distortion”
is less than 20% and to document the “distortion”
that arises from the absence of an eligible funding
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140
NYC Guidance—22.5% Exclusion
 In 2004, NYS Tax Dept issued TSB-M-04(3)C,
publishing an Opinion of Counsel that reversed a
position that government securities held as trading
assets by banks were eligible for the 22.5%
exclusion for interest in §1453(e)(12). The revision
was made effective for taxable years beginning on
or after Jan. 1, 2004.
 In October 2007, NYC published an Update on
Audit Issues reminding taxpayers that the new NYS
policy has always been NYC’s position, so that it
applies for years prior to 2004.
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141
New Jersey cases--Throwout
 NJ Tax Court, in Pfizer Inc. et al. v. Director,
Division of Taxation, held that the throwout rule was
not facially unconstitutional because there were
some circumstances in which it would not create
distortion of constitutional dimensions and because
the Division had the authority to correct any such
distortions with its discretionary adjustment
authority.
 Decision left open the possibility that the throwout
rule is unconstitutional as applied, presumably
because the Division failed to make proper
discretionary adjustments.
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142
New Jersey—Economic Nexus
 New Jersey is asserting economic nexus with
respect to out-of-state lenders, including credit card
lenders.
 This contradicts earlier unofficial pronouncements
on the subject.
 Administrative policy not to look back before 2002.
 VDA’s can be negotiated.
 Other than the validity of NJ’s economic nexus
position, issues include sourcing of credit card
interest and merchant discount as well as
application of throwout rule
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