COST Mid-Atlantic Regional State Tax Seminar
Basking Ridge, NJ
Current Developments in the Mid-Atlantic States
June 3, 2015
Matthew DiDonato, Grant Thornton LLP
Jamie Yesnowitz, Grant Thornton LLP
Arthur C. E. Burkard, Grant Thornton LLP
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Learning objectives
• Review Mid-Atlantic states' recently enacted legislation, including New
York State and City of New York Tax Reform
• Review Mid-Atlantic states' proposed legislation, including Connecticut
FY 2016/2017 Budget Proposal and other notable developments
• Identify potential implications arising from the recent law changes as
well as opportunities for your company
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NEW YORK STATE 2014 BUDGET
LEGISLATION
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NYS 2014 Budget Legislation
Summary of NYS 2014 Tax Reform (1 of 2)
• Major changes to New York's tax structure
– Most changes are effective for tax years beginning on or after Jan.
1, 2015
• Economic nexus: Subject to corporation franchise tax and metropolitan
tax (MTA) surcharge if derive $1 million or more receipts from New York
activity
• Banking corporation tax (Article 32) merged into corporation franchise
tax (Article 9-A)
• Both business and banking corporations will use three tax bases:
Business income base, capital base and fixed dollar minimum base
– Alternative minimum tax base and subsidiary capital concept will be
eliminated
– Capital base tax will be completely phased out by 2021
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NYS 2014 Budget Legislation
Summary of NYS 2014 Tax Reform (2 of 2)
•
•
•
•
•
Mandatory unitary combined reporting
– Substantial intercorporate transactions requirement eliminated
– More than 50% ownership
– Business and banking corporations may be included in same group
Apportionment: Single receipts factor with intricate customer-based sourcing rules
– Specific provisions for other business receipts, rents and royalties, and digital
products
– Annual election to use fixed amount of 8% of all net income from qualified
financial instruments in numerator
– Receipts from services sourced based on customer location hierarchy
NOLs computed on post-apportionment basis; state deduction no longer tied to
federal amount; PNOL conversion subtraction
Effective Jan. 1, 2016, corporate franchise tax rate reduced
Tax incentives and rate reductions for "qualified manufacturers"
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NEW YORK STATE FY 2015/2016
BUDGET LEGISLATION
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NYS FY 2015/2016 Budget Legislation
Economic Nexus
• 2015/2016 NYS budget legislation clarifies the following with respect to
economic nexus standard enacted last year:
– When aggregating a combined group’s receipts for purposes of
determining economic nexus under the $1M or more of aggregate
receipts threshold, only corporations that are part of a unitary group
and satisfy the ownership test of more than 50 percent are
considered.
– Revised nexus provisions exclude corporations that are not
permitted to be included in the State combined filing group for
Article 9-A from the nexus analysis.
o Article 9, Article 33, S corporations, alien corporations without
ECI, etc.
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NYS FY 2015/2016 Budget Legislation
Investment Capital Classification
•
2015/2016 NYS budget legislation further restricts the definition of
investment capital to include only stocks that:
1. Satisfy the definition of a capital asset under IRC Section 1221;
2. Are held by the taxpayer for investment for more than one year;
3. The disposition of which are, or would be, treated by the taxpayer as
generating long-term capital gains or losses under the IRC;
4. For stocks acquired after January 1, 2015, have never been held for
sale to customers in the regular course of business at any time after the
close of the day in which they are acquired; and
5. Before the close of the day on which the stock was acquired, are clearly
identified in the taxpayer’s records as stock held for investment in the
same manner as required under IRC Section 1236(A)(1). Taxpayers
have until October 1, 2015 to comply with this new reporting
requirement.
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NYS FY 2015/2016 Budget Legislation
Sourcing of Marked-to-Market Financial Instruments (1 of 2)
• 2014 NYS budget legislation created a simplifying mechanism which
gave taxpayers the option to make an annual and irrevocable election
to use a fixed amount of 8 percent of all net income from “qualified
financial instruments” in the apportionment numerator in lieu of using
customer-based sourcing.
• 2015/2016 NYS budget legislation clarifies that when the fixed 8
percent election is not made, only the net marked to market income,
gain or loss, is to be included in the apportionment factor.
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NYS FY 2015/2016 Budget Legislation
Sourcing of Marked-to-Market Financial Instruments (2 of 2)
• 2015/2016 NYS budget legislation additionally expands the definition of
"qualified financial instruments" to include the following types:
– Loans not secured by real property;
– Federal, state, and municipal debt;
– Asset-backed securities and other government agency debt;
– Corporate bonds;
– Stock or partnership interests that are not investment capital;
– Physical commodities; and
– Other financial instruments.
• The legislation now includes a definition for loans secured by real
property and includes loans in which 50 percent or more of the
collateral used to secure the loan, at the time the loan was entered into,
consists of real property.
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NYS FY 2015/2016 Budget Legislation
Qualified New York Manufacturers
• Beginning tax years on or after January 1, 2014, "qualified New York
manufacturers" are subject to a zero percent business income tax rate.
– A "qualified New York manufacturer" is defined as:
• A manufacturer that meets the New York property test, and
• Is principally engaged in manufacturing activities (>50%).
– New York-located property test:
• Property eligible for the NY investment tax credit with an
adjusted basis of at least $1 million; or
• All real and personal property located in New York.
• 2015/2016 budget legislation clarifies that no member of the
corporation’s combined group can qualify if that corporation is part of a
combined group that does not meet the test on a combined basis.
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NYS FY 2015/2016 Budget Legislation
Net Operating Losses
• 2015/2016 NYS budget legislation provides further technical corrections
to NOL deduction ordering rules:
– Taxpayers are now required to first carry back an NOL to the three
years preceding the loss year (excluding years before 2015).
– After the application of the carryback rules, any unused NOL may
be carried forward for up to 20 years.
– Additionally, an election can be made to irrevocably forgo the threeyear carryback of NOLs.
• Election is necessary for each year a new NOL is generated and
applies to all members of a combined group.
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NEW YORK CITY TAX REFORM
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New York City Tax Reform
Overview
•
NYC enacts significant tax reform effective retroactively to January 1, 2015.
•
Significant reforms fall into two overlapping categories:
1. Changes to align to the NYS corporate tax law; and
2. Expansion of the corporate tax base for corporations outside the City
such as:
• Mandatory combined reporting for unitary businesses; and
• Market based sourcing.
•
NYC reforms do not apply to S-Corporations and the Unincorporated
Business Tax.
•
NYC Changes similarly eliminate the concept of Subsidiary Capital and
additional tax on subsidiary capital.
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New York City Tax Reform
Income Tax Rates
• Income tax rate for corporations remains at 8.85 percent, however:
– A graduated system was added which reduces the tax rate for
corporations with less than $3 million of allocated business income;
– A 9 % bracket was added for “financial corporations” with more than
$100 billion of assets as reported on their end-of-year balance
sheet; and
– A preferential 4.425 % rate was added for qualifying small NYC
manufacturing corporations with less than $10 million of NYC
allocated business income (without taking into account the PNOL
conversion subtraction).
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New York City Tax Reform
Capital Tax Rates
• Capital tax rate for corporations remains at 0.15 percent of business
capital allocated to NYC, however:
– The cap has been increased from $1 million to $10 million; and
– NYC tax on business capital now excludes the first $10,000 of tax
due on the capital base.
• New York City has not conformed to the State phase-out provisions that
eliminate the capital base tax.
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New York City Tax Reform
Fixed Dollar Minimum Tax
• Fixed Dollar Minimum Tax remains the same for corporations with NYC
receipts up to $50 million, however:
– 5 new brackets created for corporations with more than $50 million
of NYC receipts.
– Maximum of $200,000 for corporations with more than $1 billion of
NYC receipts.
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New York City Tax Reform
Tax Base (1 of 2)
• NYC tax reform conforms the City’s general corporate net income tax
base to the State’s corporate net income tax base under Article 9-A.
– “Business income” is defined as entire net income from all sources
less investment income and other exempt income.
– “Investment income” includes the following:
• Capital gains in excess of capital losses,
• Income from investment capital (using the same definition as the
State), and
• Any interest deductions allowable in computing entire net
income which are directly or indirectly attributable to investment
capital or investment income.
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New York City Tax Reform
Tax Base (2 of 2)
– Investment income cannot exceed entire net income. If the amount
of interest deductions exceeds investment income, the excess of
these deductions over investment income must be added back to
entire net income.
– In lieu of deducting interest deductions from investment income,
taxpayers can elect to reduce total investment income by 40
percent.
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New York City Tax Reform
Economic Nexus
•
The City did not adopt the State’s economic nexus provisions.
•
However, NYC did adopt a limited economic nexus concept to companies issuing
credit cards.
•
A corporation is doing business in NYC if it:
– has issued credit cards to 1,000 or more customers who have a mailing
address within the NYC as of the last day of its taxable year (“customer
nexus”);
– has merchant customer(s) with merchants contracts (“contract nexus”) and
the total number of locations covered by those contracts equals 1,000 or
more locations in NYC to whom the corporation remitted payments for credit
card transactions during the taxable year; or
– the sum of the number of customers giving rise to customer nexus and the
number of locations giving rise to contract nexus equals 1,000 or more.
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New York City Tax Reform
Apportionment / Customer Based Sourcing
•
The City will continue to phase in a single receipts factor apportionment,
with full implementation in tax years starting on or after January 1, 2018.
•
Taxpayer's with $50 million or less in receipts allocated to NYC may make
a onetime, revocable election to retain the 2017 factor ratios (3.5%
property and payroll and 93% receipts), instead of 100% receipts.
•
Customer-based sourcing rules have been enacted for a number of
different revenue streams including sales of digital products, various
financial transactions, advertising, and other industry-specific receipts.
•
For receipts that are not specifically addressed, the rules direct that the
taxpayer to source those receipts to the city based on a customer location
hierarchy.
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New York City Tax Reform
Apportionment / Hierarchy for Sourcing Other Business
Receipts
• Sourcing rule Hierarchy:
1. Benefit is received in the state
2. Delivery destination
3. Prior year apportionment fraction for such receipts
4. Proxy using apportionment fraction for the current year using
receipts sourced under method 1 and 2.
• Taxpayer must exercise due diligence before proceeding to next level
and base determination on information known or that would be known
upon reasonable inquiry.
• Commissioner may adjust or taxpayer may request alternative method.
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New York City Tax Reform
Qualified New York Manufacturers (1 of 3)
•
•
•
•
For purposes of the NYC GCT, qualified manufacturers may obtain the benefit of a lower
corporation tax rate.
A preferential income tax rate of 4.425 percent will be instituted for qualified small NYC
manufacturing corporations with less than $10 million of allocated business income
(without taking into account the PNOL conversion subtraction).
NYC manufacturers with allocated income between $10 million and $20 million will
receive a partially reduced rate dependent on income. However, manufacturers may lose
some of the benefits of the reduced City manufacturer tax rates of their unallocated
business income in excess of $20 million. Manufacturers with unallocated business
income in excess of $40 million will be subject to the 8.85 percent tax rate
Certain qualifications must be met including:
– Having qualified property in the State, the adjusted basis of which at the end of the
tax year is at least:
o $1 million, or
o 50 percent of the manufacturer’s real and personal property that is located in the
State.
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New York City Tax Reform
Qualified New York Manufacturers (2 of 3)
• "Property" for a Qualified NY Manufacturer purposes conforms to NY
ITC regulations and includes tangible personal property and other
tangible property such as buildings, and structural components of
buildings, that:
1. Is depreciable under IRC Section 167;
2. Is acquired by purchase as defined in IRC Section 179(D);
3. Has a useful life of four years or more;
4. Is located in the State; and
5. Is principally used by the taxpayer in the production of goods by
manufacturing.
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New York City Tax Reform
Qualified New York Manufacturers (3 of 3)
• Manufacturing is defined for City purposes as:
– The process of working raw materials into wares suitable for use, or
– Giving new shapes, qualities, or combinations to matter which has
already gone through some artificial processes.
• The NYC definition of qualified manufacturer is different from the NYS
definition of qualified manufacturer.
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New York City Tax Reform
NYC Bank Tax
• NYC tax has adopted most of the State's changes relating to banking
corporations formerly taxable under Article 32.
– Banks now subject to the General Corporation Tax.
– City has adopted receipts sourcing rules equivalent to the State’s
rules for the sourcing of loans and financial instruments
– City has provided for subtractions for community banks and small
thrifts with less than $8 billion in assets.
• Until the City completes its phase-into a single sales factor
apportionment methodology, banks will now be required to calculate a
City property factor.
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26
New York City Tax Reform
Combined Reporting Requirements (1 of 2)
• NYC tax reform requires combined reporting for any taxpayer that:
– Owns or controls more than 50 percent of the voting power of the
capital stock of one or more other corporations;
– Owns or controls more than 50 percent of the voting power of the
capital stock of which is owned or controlled by one or more other
corporations; or
– Owns or controls more than 50 percent of the voting power of the
capital stock of which and the capital stock of one or more other
corporations, is owned or controlled by the same interests; and
– Is engaged in a unitary business with those corporations.
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New York City Tax Reform
Combined Reporting Requirements (2 of 2)
• Substantial intercorporate transaction and distortion tests have been
eliminated.
• New rules do not define what constitutes a “unitary business,” but this
concept is generally characterized as follows:
– A group of businesses which possess:
• functional integration;
• centralized management; and
• economies of scale.
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New York City Tax Reform
Prior Year Net Operating Loss Deduction (PNOLD)
• Legislation requires the available pre-apportionment NOL as of
12/31/14 to be converted to a post apportionment NOL utilizing the
following formula:
Available loss × 2014 BAP × the base year (2014) tax rate
8.85%
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New York City Tax Reform
PNOLD Carryover Requirements
• 1/10th of the PNOLD may be utilized in each year plus any unused
conversion subtractions from prior years and the balance carried
forward to 2036 (20 years).
• Election to deduct 50% of the PNOLD in 2015 and 50% in 2016.
• Small Business Corps are not subject to the 1/10th limitation.
• The PNOLD is applied before NOLD.
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CONNECTICUT FY 2016/2017
BUDGET PROPOSAL
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Connecticut FY 2016/2017 Budget Proposal
Summary of Budget Proposal (1 of 2)
• Corporate Income Tax Proposals:
– New combined reporting requirement for corporations created;
– 20 percent corporation income tax surcharge for two additional
years, to the 2016 and 2017 income years extended;
– Temporary 10 percent surcharge for the 2018 income year imposed;
– Limitations created for the amount of net operating losses and
business tax credits that corporations may use to reduce their tax
liability; and
– Business entity tax reduced.
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Connecticut FY 2016/2017 Budget Proposal
Summary of Budget Proposal (2 of 2)
• Sales and Use Tax Proposals:
– Sales and use tax split into 2 separate taxes: (1) "State revenue tax"
and (2) "Municipal revenue tax";
– State revenue tax reduced;
– Sales and use tax extended to a range of professional services;
– Rate increased on computer and data processing services; and
– Exemption for clothing and footwear costing less than $50
eliminated.
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Connecticut FY 2016/2017 Budget Proposal
Combined Reporting
• The proposed bill would require any company that is (1) a member of a
corporate group of related companies meeting certain criteria; and (2)
subject to the Connecticut corporation tax to determine its Connecticut
corporation tax liability based on the net income or capital base of the
entire group.
• Under the proposed bill, a company must use this method if it is part of
a combined group engaged in a "unitary business."
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Connecticut FY 2016/2017 Budget Proposal
Unitary Group (1 of 2)
• The proposed bill defines "unitary" as follows:
– A single economic enterprise that is integrated, or interrelated
enough through its activities to provide mutual benefit and produce
a significant sharing or exchanges of value among it's entities or a
significant flow of value among it's separate parts.
• Unitary group may be:
– Either separate parts of single entity; or
– A group of separate entities under common ownership.
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Connecticut FY 2016/2017 Budget Proposal
Unitary Group (2 of 2)
• Common Ownership:
– If the same entity or entities directly or indirectly own more than 50%
of voting control of each of them.
• Combined Group:
– All the companies that:
• Have common ownership,
• Are engaged in a unitary business, and
• Have at least one member that is subject to the CT corporation
tax.
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Connecticut FY 2016/2017 Budget Proposal
Group Filing Requirements
• The proposed bill gives a combined group the option of determining its
members' net income, capital base, and apportionment factors on a:
– World wide basis (including foreign affiliates), or
– Affiliated group basis.
• Filing election would be binding for the income year in which it is made
and the following 10 years.
• If an election is not made to use the world wide basis or affiliated group,
net income, the capital base, and the apportionment factors must be
determined on a "water's edge basis."
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Connecticut FY 2016/2017 Budget Proposal
Corporate Income Tax Surcharge
• The proposed bill would enact the following in regards to the CT
corporate income tax surcharge:
– Extension of the 20 percent corporation income tax surcharge for 2
additional years to the 2016 and 2017 income years; and
– Imposition of a temporary 10 percent surcharge for the 2018 income
year.
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Connecticut FY 2016/2017 Budget Proposal
Net Operating Losses
• Beginning with the 2015 income year, the bill would limit the amount of
NOL a corporation may carry forward to the lesser of:
– 50 percent of net income, or for companies with taxable income in
other states, 50 percent of the net income apportioned to
Connecticut, or
– The excess of NOL over the NOL being carried forward from prior
income years.
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Connecticut FY 2016/2017 Budget Proposal
Corporate Income Tax Credits
• Beginning with the 2015 income year, the bill would reduce the tax
credit limit to 50.01 percent.
• Insurance Premium Tax Credit:
– The bill would extend, to 2015 and 2016, the temporary cap on the
maximum insurance premium tax liability that an insurer may offset
through tax credits.
• Film and Digital Media Production Tax Credit:
– The bill would extend, to 2016 and 2017, the temporary moratorium
on issuing film and digital media production tax credits for certain
motion pictures.
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Connecticut FY 2016/2017 Budget Proposal
Business Entity Tax
• Beginning with the 2015 tax year, the bill would reduce the business
entity tax from $250 to $125.
• The tax is due every other year and applies to the following entities:
– Limited liability corporations,
– Limited liability partnerships,
– Limited partnerships, and
– S-Corporations required to register with the Secretary of State.
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Connecticut FY 2016/2017 Budget Proposal
S&U Tax - Rates
• Beginning October 1, 2015, the proposed bill would split the 6.35%
sales and use tax rate into the following:
– 5.85 percent "state revenue tax," and
– 0.50 percent "municipal revenue tax."
• Beginning July 1, 2016, the proposed bill would:
– Lower the state revenue tax from 5.85 percent to 5.35 percent; and
– Maintain the municipal revenue tax rate at 0.05 percent.
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Connecticut FY 2016/2017 Budget Proposal
S&U Tax - Computer and Data Processing Services
• The proposed bill would increase the sales and use tax on computer
and data processing services from 1 percent to 6.35 percent.
– The types of computer and data processing services subject to tax
expanded to include the creation, development, hosting, and
maintenance of a web site.
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Connecticut FY 2016/2017 Budget Proposal
S&U Tax – Clothing and Footwear Exemption
• The proposed bill would eliminate the sales and use tax exemption for
clothing and footwear costing less than $50.
• Exemption for clothing and footwear during "sales-tax-free-week" also
limited to items costing less than $100, rather than $300.
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Connecticut FY 2016/2017 Budget Proposal
S&U Tax – New Taxable Services
• The proposed bill would extend the sales and use tax to the following
professional services:
CPAs and other accounting services
Other management consulting services
Architectural services
Other scientific and technical consulting services
Engineering services
Direct mail advertising
Drafting services
Advertising material distribution services
Building inspection services
Marketing research and public opinion polling
Geophysical surveying and mapping services
Translation and interpretation services
Surveying and mapping services, except geophysical
Veterinary services
Interior design services
All other professional, scientific, and technical services
Industrial design and other specialized design services
Other gambling industries
Administrative management and general management
consulting services
Golf courses and country clubs
Human resources consulting services
Dry cleaning and laundry services, except coin operated
services
Process, physical distribution, and logistic consulting
services
Marketing consulting services
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NEW JERSEY
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The 2014 Budget
• Significant legislation enacted on June 30, 2014 for the 2015 fiscal year:
– Operational income redefined
– Limitations on partners' ability to claim refunds for tax paid on their
behalf by in-state partnerships
– Limitations on use of NOL deductions and carryovers after certain
debts have been discharged
– Click-through sales and use tax nexus
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Other Notable Developments
• On May 11, 2015, Governor Chris Christie conditionally vetoed A 939,
which would have expanded state law to require a report on whether
tax incentives have met their goal
• New Jersey Division of Taxation Director Michael Bryan resigned
effective March 10, 2015. Dennis Shilling is currently serving as the
Acting Director
• Village Super Market of PA Inc. v. Div. of Taxation was dismissed from
the New Jersey Superior Court, Appellate Division on March 9, 2015
due to settlement between the parties
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PENNSYLVANIA
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Related Party Expense Addback
• The addback provision
– "[F]or taxable years beginning after December 31, 2014, … no
deduction shall be allowed for an intangible expense or cost, or an
interest expense or cost, … accrued or incurred directly or indirectly
in connection with … an affiliated entity…."
• Numerous exceptions to addback:
– Arm's length / non-tax avoidance
– Treaty
– Conduit
– Apportioned credit to extent affiliated entity paid Pennsylvania
Corporate Net Income Tax on expense added back
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Other Notable Corporate Income Tax Issues
– Tax statutes
• CSFT eventually will be eliminated
– .67 mills for 2014
– .45 mills for 2015, and then set to expire
• CNI net operating loss limitations loosened somewhat
– Tax years beginning after 2014 – greater of $4 million or
25% of taxable income
– Tax years beginning after 2015 – greater of $5 million or
30% of taxable income
– Policies by Department
• Liberal use of "sham transaction" doctrine evidenced in the first
rulings published by new Board of Finance and Revenue
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Elements of the Wolf Plan
– Tom Wolf, the new governor of Pennsylvania, has proposed tax
reforms that are currently being considered in the PA Senate:
• Corporate income tax would go down from 9.99% to 5.99% in
2016 and 4.99% in 2018
• Combined reporting in 2016
• Personal income tax would go up from 3.07% to 3.7%
• Sales tax rate would go up from 6% to 6.6%
• Sales tax base would be broadened to include numerous
"miscellaneous services", excluding certain B-to-B services, and
digital products delivered electronically or digitally
– PA House bill -- property tax rate for sales / income tax rate tradeoff
– Which bill comes out? Will PA tax rates significantly change?
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DELAWARE
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Unclaimed Property Developments
• SB 11 adopted in February 2015 – contains a number of notable
provisions:
– Limits on total number of audits that can be assigned to one outside
contractor, and sets a five-year limit on contracts
– Requires assurance in contract that Delaware Department of
Finance cannot be involved until after two-year cooling-off period
– Requires publication of unclaimed property audit manual containing
procedural guidelines, and updated regulations
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DISTRICT OF COLUMBIA
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2014 Budget Legislation (Income Tax)
• Budget legislation enacts single sales factor apportionment, effective
for tax years beginning after Dec. 31, 2014
– Previously used three-factor formula with double-weighted sales
• Market-based sourcing for sales other than tangible personal
property
– Detailed sourcing rules
• DC has indicated it will rely upon both MTC and MA sourcing rules.
– Sale of services sourced to location of delivery
– States of assignment may be approximated if they are not determinable
using detailed rules
– Originally effective 10/1/14 but updated to align with single sales factor
apportionment date of 1/1/15
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2014 Budget Legislation (Sales Tax)
• Sales and Use Tax Legislation
– Services subject to sales tax expanded effective Oct. 1, 2014
• Now taxable and included in the definition of "sales at retail" are:
o
o
o
o
o
Health club services
Self-storage rentals
Car and carpet cleaning services
Bottled water delivery
Bowling alley/billiard parlor services
• DC has indicated this may only be the beginning of broadening the tax base
– Most controversial service industry subjected to tax was health club
services (opponents characterized this as the "yoga tax")
– Regulations on the sales tax base broadening have been released
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MARYLAND
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The New Governor
• Newly elected Republican Governor Larry Hogan takes office
• Interesting dynamic as MD has a historically Democratic legislature
• Hogan's State of the State Address proposed tax cuts including:
o Elimination of personal property tax for businesses with <$10,000 in
personal property
o Changes to Sales and Use Equivalency Tax hikes on gas
o Elimination of tax on retirement income and of automatic gas tax hikes
o Repealing "rain tax" levied to fund stormwater management
• Cost of proposed tax cuts is approximately $27 million in fiscal year,
funded by budget cuts
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Proposed Compliance Initiative / Amnesty
• Gov. Hogan proposes to supply the MD Comptroller with additional
$1 million to hire new employees to collect an estimated $12 million
of taxes in arrears
• This compliance initiative may deal with taxpayers not compliant
with Gore and Nordstrom decisions
• Tax Amnesty adopted – 9/1/15-10/31/15
– Potential to eliminate penalty and ½ of interest owed
– Potential to use payment agreement with Comptroller to pay
obligations by 12/31/16
• Hogan hopes these efforts will provide revenue to aid in closing
budget gap and cutting taxes
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Does Anything Change Because of Wynne?
• In Wynne, the U.S. Supreme Court recently held that the credit for taxes
paid to other states under the Maryland personal income tax was
unconstitutional
• The decision will cost the state at least $200 million in refunds to
Maryland residents, plus prospective revenue
• One should expect significant tax reforms to come in the near future,
including:
– Threat of combined reporting for corporate income tax
– Click-through nexus for sales / use tax
– Expansion of sales tax base / rate
– MD Tax Revision Commission (maybe next year?)
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VIRGINIA
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Nielsen vs Board of Arlington County (BPOL)
Virginia's Business, Professional and Occupational License (BPOL) is a gross
receipts tax on business occurring at a definite place of business. In the event
gross receipts cannot easily be attributed to a definite place of business, a
reasonable method of apportionment is allowed.
• The Nielsen Company, the taxpayer at issue and a business service
provider, had a definite place of business in Arlington County as well as
offices in other states and Virginia localities
• In 2011, Nielsen applied for a refund for tax years 2008-2010 for out-ofstate deductions. It also claimed out-of-state deductions on its 2011 and
2012 BPOL returns in accordance with a methodology published by the
Virginia Tax Commissioner (P.D. 10-228 (9/29/2010) & 12-89 (5/31/2012))
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Nielsen Supreme Court Appeal
• The Supreme Court of Virginia reversed and remanded the case for
further review
• The Court held that the payroll apportionment methodology is allowable
in determining BPOL out-of-state deductions when out-of-state gross
receipts cannot be accurately determined
• The Court also held that it is not arbitrary and capricious to apply this
apportionment method as it only applies when the taxpayer is unable to
show where gross receipts were earned, as is often the case for
services providers
• The Court did not determine which approach should be used; only that
the apportionment approach did not contradict the law
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Nielsen Tax Ramifications
• Taxpayers are encouraged to follow the guidance offered by the
Virginia Tax Commissioner before the decision by the Arlington
Circuit Court
• This is not the final ruling as the circuit court will be reviewing the
case and could issue a different opinion on the correct treatment
based on proper and new evidence
• Taxpayers may have the option to seek refunds through filing
amended returns if they have not previously used the payroll
apportionment method
• Service businesses, in particular, may be able to benefit from this
refund opportunity
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Other Notable Developments
• Exceptions to addback are amended (with retroactive
effect)
• Fairly significant audit activity on intangible addback
exceptions
• Accelerated sales tax phaseout – annual threshold for
dealers and direct payment permit holders to make
accelerated sales tax payments has gone up and down –
threshold is at $26 million effective June 2015, but goes up
to $48.5 million effective June 2016
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WEST VIRGINIA
[nothing to note]
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RECENT DETERMINATIONS
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68
MATTER OF TD HOLDINGS II, INC.
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69
Matter of TD Holdings II, Inc.
Issue(s)
• Whether a taxpayer must apply New York State net operating losses
against ENI when its franchise tax is computed based on an alternative
base?
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70
Matter of TD Holdings II, Inc.
NYS Franchise Tax
• During the tax years at issue, the New York State franchise tax is
computed using the greatest of the following tax bases:
– A percentage of the taxpayer's ENI allocated to New York;
– A percentage of the taxpayer's taxable assets allocated to New
York;
– A percentage of the taxpayers alternative ENI allocated to New
York; or
– A minimum tax of $250.
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71
Matter of TD Holdings II, Inc.
Administrative Law Judge (ALJ) Determination
• The ALJ accepted the taxpayer's argument that while a New York NOL
cannot exceed the federal NOL for a particular tax year, there is no
corresponding provision in the tax law providing that a New York NOL
deduction can never be less than the federal deduction; and
• Therefore, where a taxpayer's franchise tax is computed based on an
alternative base (capital base) other than ENI, the utilization of a New
York NOLs is not required.
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72
MATTER OF EXPEDIA INC.
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73
Matter of Expedia Inc.
Issue(s)
• Whether receipts from online travel facilitation is characterized as
"service receipts" or "other business receipts" for New York State
sourcing purposes?
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74
Matter of Expedia Inc.
NYS Franchise Tax
• NYS sourcing rules for receipts from "services" based on the where the
taxpayer performed its services.
• NYS sourcing rules for "other receipts" based on the location earned
resulting in a "market-based" approach.
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75
Matter of Expedia Inc.
Administrative Law Judge (ALJ) Determination
• The ALJ distinguished that the receipts were directly related to travel
facilitation services and that these services had many (human element)
components and did not result from a single, instantaneous, fully
automated transaction.
• As a result, the ALJ determined that the receipts from travel facilitation
services performed by the Taxpayer were correctly sourced to the
location where these services were performed outside of NYS, and
rejected the Department's attempt to source the receipts as "other
business receipts."
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76
MATTER OF SUNGARD
SECURITIES FINANCE LLC
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77
Matter of SunGard Securities Finance LLC
Issue(s)
• Whether certain services related to performance analytics are
considered to be the furnishing of information services and if so, would
the information qualify for the "personal or individual" sales tax
exclusion?
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78
Matter of SunGard Securities Finance LLC
NYS Sales Tax on Information Services
• NYS imposes a sales tax on the furnishing of information services, but
not on information that is personal or individual in nature and which may
not be substantially incorporated in reports furnished to other
customers.
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79
Matter of SunGard Securities Finance LLC
NYS Tribunal Decision
• The NYS Tribunal affirmed an Administrative Law Judge decision which
stated that the not only was the performance analytics service the
furnishing of information, it also did not qualify for the "personal or
individual" exclusion because it was available to other customers
through various other reports.
• As a result, the receipts from the performance analytics service was
determined to be subject to sales tax in NYS.
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Questions?
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Contacts
Matthew DiDonato
Grant Thornton LLP
New York, NY
matthew.didonato@us.gt.com
212.542.9960
Arthur C. E. Burkard
Grant Thornton LLP
New York, NY
art.burkard@us.gt.com
212.542.9600
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Jamie Yesnowitz
Grant Thornton LLP
Washington, DC
jamie.yesnowitz@us.gt.com
202.521.1504
Tax Professional Standards Statement
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circumstances of any person. If you are interested in the subject of this
document we encourage you to contact us or an independent tax advisor to
discuss the potential application to your particular situation. Nothing herein
shall be construed as imposing a limitation on any person from disclosing the
tax treatment or tax structure of any matter addressed herein. To the extent
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