What’s Happening Tuesday December 13, 2011
Hosted by Ginny Buckner Kissling Ann Curry Principal, Ryan, LLC & Fred Marcus Matt Lauer and Principal, Horwood, Marcus, with Berk, Chtd. Doug Lindholm & William Chris Matthews & Mc. Arthur Chris Matthews & Council on State Taxation Tyco Electronics David Gregory
Program Dale Busacker, Minnesota Mike Yopp, Tennessee Donna Lecky, Alabama Eric Coffill, California Jason Wyman, Illinois Mark Eidman, Texas Fred Nicely, Ohio Pat Van Tiflin, Michigan
Program Kurt Kawafuchi, Hawaii John Barrie, Missouri / D. C. Jonathan Block, Maine / New Hampshire Jason Zorfas, Massachusetts James Wetzler, New York Dick Genetelli, New York David Shipley, Pennsylvania / New Jersey
NEWS BREAK Presented by Bill Townsend Shareholder Fowler White Boggs Banker LLP Marc Simonetti & Partner Sutherland Asbill & Brennan
FEATURING SPECIAL GUESTS: Mr. Mark Eidman Mr. Fred Nicely Partner Tax Counsel Scott, Douglass & Council On State Taxation Mc. Connico LLP Washington, DC Austin, Texas Mr. Patrick Van Tiflin Partner Honigman, Miller, Schwartz, and Cohn LLP Lansing, Michigan
FEATURING SPECIAL GUESTS: Mr. James Wetzler Mr. Richard Genetelli Director, Multi-State Tax President Group The Genetelli Consulting Deloitte Tax LLP Group New York, New York Mr. David Shipley Partner Mc. Carter & English, LLP Philadelphia, Pennsylvania
Power. Point Presentation To access this presentation, go to: www. saltlawyers. com
Minnesota Developments Mr. Dale Busacker Director, State and Local Taxes Grant Thornton LLP Minneapolis, Minnesota
2011 Legislative Update • Federal Income Tax Update Through April 14, 2011 – Adjustment continued for bonus depreciation and Section 179 expensing • Sales tax – data center exemption • Ban on contingency fee tax compliance assistance contracts with vendors • Ringtones are no longer subject to sales tax
Pending Litigation • R. J. Reynolds Tobacco Company • In 1999, R. J. Reynolds Tobacco Company (Reynolds) and affiliates sold the international tobacco brands and operations of an affiliate located in Switzerland. Reynolds included the gain as apportionable business income and included the gain in the sales factor denominator. • The Department issued its audit excluding the gain from the sales factor denominator. • Reynolds protested the assessment and filed a refund claim taking the position that the gain is nonbusiness income. • The Department denied the protest and the refund claim. • Reynolds filed in Tax Court and the Court heard the summary judgment motion on April 27, 2011.
Pending Litigation • SAP Retail, Inc. • SAP sold $11. 5 million of prewritten software to Best Buy along with $7 million of consulting and professional services. • The Department assessed sales tax on these services as fabrication labor or as installation charges. The Department exempted invoices where the software code was modified. • SAP's position is that these services are exempt consulting and professional services. SAP especially objects to the Department assessing tax on reimbursements that it received from Best Buy for expenses that its employees paid for airfare, car rental, hotel charges and meals.
Pending Litigation • Express Scripts, Inc. • Issue 1 – Taxpayer asserts that since they own only a 1/3 interest in the partnership, the partnership income or loss is directly allocated as non-unitary, non-business income. • Issue 2 – Taxpayer asserts that the statute does not require apportionment of the Section 382 limit on the use of NOL carryovers.
Pending Litigation • SBC Data. Comm, Inc. • Taxpayer is taking the position that holding companies whose only asset is holding an interest in US partnerships qualify as a foreign operation company during 2000 and 2001. The position is that the apportionment factors don't flow up in the determination if the entity qualifies as an FOC. The FOC qualification laws were significantly changed in 2005 and in 2008.
Administrative Update • Worker Classification Voluntary Compliance − Initiative expires December 16 − Pay 3% tax on compensation paid to affected workers during 2010 and treat them as employees going forward − Waiver of penalties and interest and prior liabilities • E-services online filing and paying system − Filing returns and paying taxes − Viewing correspondence and receiving messages
Tennessee Developments Mr. Mike Yopp Partner Waller Lansden Dortch & Davis, LLP Nashville, Tennessee
Alabama Developments Ms. Donna M. Lecky Vice President, Tax Omnicare, Inc. Covington, Kentucky
Business/Nonbusiness Income • Functional and transactional changed from “and” to “or” • Blue Bell Creameries, LP v. Roberts - Capital gains from redemption of stock are Business Earnings - sale was unrelated to ice cream but materially contributed to Blue Bell’s earnings • Heinz v. Farr – Same result • Lesson: Any sale in Tennessee will be business earnings.
Legislative Developments • Incentives added for firms already head quartered in Tennessee that remodel or renovate • Gain from deemed sale of Goodwill in Sec. 338 Election excluded from both numerator and denominator of Receipts Factor • Refund claims may now be extended by agreement – eliminates necessity for litigation • Interest on refund claim legislation passed last year in dispute
Revenue and Letter Rulings • After two year hiatus is rulings, approximately 30 rulings released since change in administration • Will not give duplicate rulings – but will give comfort letter • Expedited Rulings; $10, 000; 7 day/60 day
Variance Procedure • Comptroller studied the issue and noted that under Commissioners Chumley and Farr use increased significantly • Unlike penalty and refunds which can be reviewed by Tennessee Attorney General office, no way to monitor variances.
Other Cases • CAO Holdings, Inc. v. Trost - In order to pierce have a sham transaction. . . , two principles apply. First, “[f]orm and structure are frequently … controlling…. ” Second, taxpayers can arrange their affairs to minimize taxes • Signal Mountain Cement – Federal capitalization rules do not control Tennessee property tax valuation – exclude freight, sales tax, installation costs
Alabama Developments Ms. Donna M. Lecky Vice President, Tax Omnicare, Inc. Covington, Kentucky
Alabama Developments • Corporate Income Taxes: Double Weighted Sales Factor and Market-Based Sourcing. Amendment of Act 2011 -616. • The Tariff Credit Act 2011 -648 and Related Challenges: Gibson v. Bentley, Case No. CV 2011 -900998 (August 3, 2011). • IRC Section 199: Domestic Production Activities Deduction: Taxable income limitation. GKN Westland Aerospace, Inc. v State DOR, Admin. Law Div. Dkt. No. BIT. 10 -988 (July 25, 2011). • Sales and Use Tax: Alabama Streamlined Sales Tax Commission Issues Landmark Report. • Outlook for 2012: Alabama Taxpayers Bill of Rights, H. B. 427
Act 2011 -616 Amended • Alabama’s version of the Multistate Tax Compact amended to double-weight the sales factor in the currently equally weighted 3 factor formula used to apportion income in the State; • The Act amends Alabama’s apportionment methodology by converting the State from a cost of performance to a market source state for certain receipts from intangibles or services. Effective for tax years beginning on or after December 31, 2010; and, • The market-based sourcing rule in the bill closely tracks the Multistate Tax Commissions draft model provision.
The Tariff Credit Act of 2011 • Act 2011 -648 is designed to: – Encourage foreign manufacturers to locate in Alabama by providing an income tax credit for investing in qualifying projects; – Minimum capital investment is $100 M; – Activities that qualify are industrial, warehousing and research; – The project must create 100 new jobs; and, – The credit shall not exceed the lesser of $20 M or 20% of the total amount of the investing Company’s capital investment.
Gibson v. Bentley • Challenge to the Tariff Credit Act by 2 Teachers. Lawsuit funded by the AEA Teachers Union • Basis-Technical Argument: • Section 70 of the 1901 Alabama Constitution requires that all bills for raising revenue must originate in the House of Representatives not the Senate.
GKN Westland Aerospace, Inc. v. State Department of Revenue • Case of First Impression: – Held that a corporate taxpayer properly calculated its IRC Section 199 domestic production activities deduction (“DPAD”) by applying the taxable income limitation on a separate company basis for Alabama tax purposes; – At issue was the income limitation. The Judge reasoned that the taxable income limitation did not apply to the subject years because the Taxpayer had income as a separate company in those years greater that the allowable DPADs; and,
Sales and Use Tax • Alabama Streamlined Sales Tax Commission: – Commission charged with studying the feasibility of the State becoming a member of the Streamlined Sales and Use Tax Agreement; – The Commission, in its preliminary report, agreed that the ADOR would be the ‘single entity administrator’ (“SEA”) should Congress enact certain legislation recently introduced; – If Congressional legislation is enacted along with state conforming legislation, the ADOR would become the SEA for both filing and auditing; and,
Outlook 2012: The Re. Introduction of Alabama H. B. 427 • Introduced in the Spring, 2011: – Would have created an independent tax tribunal-the Alabama Tax Appeals Commission-thus abolishing the Administrative Law Division; – H. B. 427 was passed unanimously by the House last session and received a favorable vote from the Senate Judiciary Committee before stalling in the Senate logjam during the last few days of the session; and, – The bill contained other important provisions such as, • Extending the time period for filing an appeal or petition from 30 to 60 days, and • Eliminating the failure to file penalty for individual
California Developments Mr. Eric J. Coffill Partner Morrison & Foerster LLP Sacramento, California
FTB ADMINISTRATIVE DEVELOPMENTS • FTB Notice 2011 -06: “Doing Business” Standard
FTB ADMINISTRATIVE DEVELOPMENTS • Results of VCI 2 Program (ended October 31, 2011)
FTB ADMINISTRATIVE DEVELOPMENTS • Adoption of 25138. 5 Single Sales Factor Regulation
FTB ADMINISTRATIVE DEVELOPMENTS • Internal “Business Income” Confusion • Appeal of Pacific Bell Telephone (September 20, 2011)
FTB JUDICIAL DEVELOPMENTS • California Taxpayers’ Ass’n v. FTB (2011) • Apple Inc. v. FTB (2011) • The Gillette Co. v. FTB (Multistate Tax Compact Cases)
Illinois Developments Mr. Jason Wyman Partner Deloitte Tax LLP Chicago, Illinois
Illinois — Legislative Action • SB 2505, P. A. 96 -1496 signed January 13, 2011 • Corporate Income Tax Rate • 1/1/2011 – from 4. 8% to 7% • 1/1/2015 – from 7% to 5. 25% • 1/1/2025 – from 5. 25% to 4. 8% • Replacement Tax unchanged at 2. 5% on corporations • Fiscal Year Taxpayer Impact • Weighted Average • Specific Accounting
Illinois — Legislative Action – Cont'd • SB 2505, P. A. 96 -1496 signed January 13, 2011 • Personal Income Tax Rate • 1/1/2011 – from 3% to 5% • 1/1/2015 – from 5% to 3. 75% • 1/1/2025 – from 3. 75% to 3. 25% • Net Operating Loss Carryforward Absorption Suspension • Tax Years Ending after 12/31/2010 and before 12/31/2014 • Carryover period extended by suspension years • Fiscal Year Taxpayers – four year suspension • Final Year Returns – NOL Carryforwards Lost
Illinois — Legislative Action – Cont'd • HB 2955, P. A. 97 -0507 signed August 23, 2011 • Technical Corrections Bill • Full or Partial Combination of Holding Companies • Definition – largely intangible receipts • Pro-rata inclusion or other reasonable method, consistently applied • Notable for organizations with multiple Illinois filings – Section 304 (b), (c), or (d).
Illinois – Veto Session Tax Legislation • Two versions – nearly identical (SB 397 and HB 1883). • HB 1883 passed with supermajority in Senate, defeated in House by a vote of 99 to 8, with six House Members voting present • Notable Exclusion – no decoupling from Bonus Depreciation in 2011 • Differences • Earned Income Tax Credit – HB 1883 increased to 10% vs 7. 5% • Personal Exemption – HB 1883 allowed personal exemption to be indexed to CPI • Live Theatre Production Credit – HB 1883
Illinois – Veto Session Tax Legislation – Cont’d • Other provisions • Independent Tax Tribunal to hear tax disputes; organized separate and independent from Department of Revenue • NOLs – most recent version allowed 100 k absorption for tax years ending on or after 12/31/2012 • Prior versions - full absorption • Fiscal Year Taxpayer Impact • Elective change in apportionment formula for exchanges • Sunset extension for all tax exemptions, credits and deductions scheduled to expire in 2011, 2012 and 2013 for another five years, including R&D tax credit. • Edge Tax Credit for Sears and extension of economic development agreement in Hoffman Estates • Estate Tax Exclusion increases
Illinois – Veto Legislation - Current • HB 1883 Split into two bills • SB 397 – Business Provisions • SB 400 – Individual Provisions • Passed House – 12/12/2011 • Senate Vote - Today
Illinois Click-through Nexus Updates Overview and Developments – HB 3659 - effective 7/1/11 – NY-style click-through provisions without “rebuttable presumption” – Also provided for affiliate nexus for out-of-state sellers with relationship with in-state sellers selling same type of product using same trade name or trademark. – Various Internet retailers announced intention to sever any potential nexus creating relationships with in-state sellers and in fact terminated these relationships following passage of the law.
Illinois Click-through Nexus Efforts to repeal Updates • At least two bills have been introduced repealing or modifying effect of HB 3659: – HB 3869 (Dave Winters (R), Rockford) » Amends the effective date of the definition change to retailer maintaining business inside the state to end “on the first day of the month to occur not less than 30 days after the effective date of the Amendatory Act. ” » Referred to Rules Committee, 10/27/11. – SB 1783 (Antonio Munoz (D) Chicago) » Made changes to affiliate nexus in existing statute and declared that “an advertising link or affiliate marketing link is not sufficient to qualify a retailer as a retailer maintaining a place of business in this State. ” » Introduced 2/9/11, last action 3/18/11 Re-referred to
Illinois Click-through Nexus Updates Performance Marketing Association v. Hamer – United States District Court – Northern District of Illinois (filed 6/1/11)- Complaint for Declaratory Relief – Basis: • Act violates the Commerce Clause. • Act allows IL to impermissibly regulate commerce outside its borders. • Act violates "Internet" Tax Freedom Act. – Relief • Declaration that “definition of retailer maintaining business in Illinois” contained in Act is unconstitutional under Commerce Clause and Quill and violates "Internet" Tax Freedom Act. • Permanent Injunction against enforcement.
Illinois Click-through Updates – Pending Litigation Performance Marketing Association v. Hamer – Circuit Court of Cook County (filed 7/27/11)- Complaint for Declaratory Judgment and Permanent Injunction – Key Allegations • Act affects the livelihood of approximately 9, 000 companies in Illinois that have been negatively affected by passage of the law and subsequent cancellation of contracts with online retailers. • Act lacks specificity related to $10, 000 in four calendar quarters provision that would limit such revenue to Illinois connected transactions. • Act discriminates against Internet commerce. • Use tax sought to be collected by Act is already due from IL
Illinois Click-through Updates – Pending Litigation Performance Marketing Association v. Hamer – Circuit Court of Cook County (filed 7/27/11)- Complaint for Declaratory Judgment and Permanent Injunction – Basis: • Act violates the Commerce Clause • Act allows IL to impermissibly regulate commerce outside its borders • Act violates "Internet" Tax Freedom Act – Relief • Declaration that “definition of retailer maintaining business in Illinois” contained in Act is unconstitutional under Commerce Clause and Quill and violates "Internet" Tax Freedom Act • Permanent Injunction against enforcement
Taxability of Computers, Software, and Related Systems – Illinois Access to Online Database is Not Taxable if No Transfer of Software and/or TPP – ST 11 -0052 GIL, Ill. Dept. of Rev. 6/30/11. – Issue: Whether access to an online database of information is taxable. – Ruling : Service is not taxable. Digital Signatures Generally Not Taxable; Related Software May Be Taxable – ST 11 -0015 GIL, Ill. Dept. of Rev. 3/29/11. – Issue: Whether a digital signature or identification service is taxable. – Ruling: • Service not considered "computer software" and therefore is
Illinois Home Rule Updates – Pending Litigation Regional Transportation Authority v. City of Kankakee et, al. – Circuit Court of Cook County (filed 8/23/11) • Key Allegations – Localities distributing local sales tax revenue to companies sourcing sales to sham offices – Companies set up structure to avoid paying locally imposed taxes, including higher cook county rate – Complaint seeks damages to compensate for loss of tax revenue due to municipalities unlawful conduct – City of Chicago v City of Kankakee et, al. filed same day limited to 1/1/2004 and forward
FEATURING SPECIAL GUESTS: Mr. Mark Eidman Mr. Fred Nicely Partner Tax Counsel Scott, Douglass & Council On State Taxation Mc. Connico LLP Washington, DC Austin, Texas Mr. Patrick Van Tiflin Partner Honigman, Miller, Schwartz, and Cohn LLP Lansing, Michigan
Constitutional Challenges • In re Allcat Claims Service, L. P. and John Weakly, Cause No. 11 -0589. • Nestle USA, Inc. , Switchplace, LLC and NSBMA, LP v. Combs, Cause No. 110855 Texas
In re Allcat Claims Service • Constitutional Issue – Bullock Amendment: • No state income tax without voter approval – Margin Tax • Is an income tax = it taxes a natural person’s share of partnership income – Texas voters never approved the Margin Tax Texas
In re Allcat Claims Service • Supreme Court’s Decision— Constitutional Issue – Texas abandoned the aggregate theory of partnerships in favor of the entity theory – Therefore, the Margin Tax is a tax on Allcat as an entity, not a tax on the net income of its natural person limited partners. – The facial challenge is without merit Texas
In re Allcat Claims Service • Jurisdictional Issue – Can facial and/or as-applied constitutional challenges be brought directly to the Texas Supreme Court without lower court review? • Facial = yes As-applied = no Texas
Nestle USA v. Combs • Constitutional Issues – Lack of uniform treatment for similar taxpayers by the Margin Tax leads to violations of: • • Equal and uniform clause of the TX Constitution Equal protection clause of the US Constitution Commerce clause of the US Constitution Due process clause of the 14 th Amendment Texas
Nestle USA v. Combs Argument: – Some classifications and distinctions made by the Margin Tax rules bear no reasonable relationship to the tax’s purpose—a tax on the privilege of doing business in the state. – E. g. , “total revenue” is not equal among taxpayers, some deductions not available to all taxpayers, rate discounts not tied to Texas privilege of doing business
New Refund Procedure • Comptroller Rule 3. 325 – Replaced effective July 19, 2011 – Laundry list must be stated “fully and in detail” for a valid refund claim • • • Purchaser’s / seller’s name Invoice number Date, description of item Specific reason for refund Total amount of refund request Identification of all taxing jurisdictions involved Texas
New Letter Ruling Procedure • Two tier system – General Information letters applying law to a general set of facts (nonbinding) – Declaratory rulings applying law to specific facts for an individual taxpayer (binding, but only for individual taxpayer) • New procedure will be written into Comptroller rules. Texas
Litigation • Grocers Assoc. et al. v. Wilkins – Ohio Supreme Court held that the CAT is akin to a “franchise tax” and accordingly the measurement of the privilege may include non-taxable items such as food • Overstock. com v. Levin – “Substantial nexus” challenge based on $500, 000 in taxable gross receipts – case dismissed because tp was not assessed • Beaver Excavating v. Levin – CAT on motor fuel upheld – TP appealed to Ohio Supreme Court on 9/9/11 – discretionary • L. L. Bean, Inc. Final Determination (issued 8/10/2010) – Asserting Ohio has the ability to impose the CAT on a taxpayer lacking a physical presence in the state Ohio – Case is now pending before the Ohio Board of Tax Appeals
Ohio CAT – Revenue • Three CAT Measurement Periods – adjustment to rate only if CAT over collects • Actual Collections – 1 st Measurement Period: – FY 2006 -07: $868. 3 M - Target: $815 M [+ 6. 5%] • Actual Collections – 2 nd Measurement Period: – FY 2009: $1. 18 B - Target: $1. 19 B [-1%] Ohio • Actual Collections – Final Measurement
Administrative Update – Voluntary Disclosure Agreements (VDAs) • Information Release CAT 2008 -01 – Revised September 2010 • Allows VDA for CAT – Interest only – no penalties (as long as taxpayer never contacted via audit/compliance) – Beginning January 1, 2011, a look back period of 3 years plus current year • VDA Stats*: – Total Requests Received: 539 • Total Requests Cancelled: 104 – Total Requests Completed: 284 – Total Amount Collected: $ 8, 373, 972 Ohio
CAT Division’s Nexus Unit • • Began November 2009 Current Statistics*: – Letters Sent: 12, 793 – Registered Taxpayers: 4, 591 – Nexus Assessments Issued: 709** – Collected $19, 220, 999 – Will issue estimated assessments • Includes 55% penalty • $1, 000 penalty for failure to register • *Statistics as of December 5, 2011 ** Per taxpayer figure Ohio
2011 CAT Legislation • Sub. H. B. 58 - Effective March 7, 2011 – Creates a refundable jobs retention tax credit for eligible businesses that meet certain conditions – Department of Development must recommend the granting of this credit prior to July 1, 2011 • H. B. 114 Effective March 30, 2011 – Adds an exclusion for receipts from like-kind exchanges of petroleum products, including motor fuel – Uncodified law makes this section effective back to July 1, 2005 Ohio
2011 CAT Legislation • Am. Sub. H. B. 153 (Budget Bill) - Signed June 30, 2011 – Among other things, Changes distribution of CAT funds to funnel more revenue to the GRF • Decreases funding to local jurisdictions and increases amounts to GRF • 2012 prior to legislation – 5. 3% to GRF now 25% to GRF • 2013 – 50% to GRF with legislation • Am. Sub. H. B. 277 - Signed July 15, 2011 – Adds exclusion for receipts in excess of a licensed casino operator’s gross casino revenue – Casinos now only taxed on net receipts (gross receipts after winnings) Ohio
Pending Legislative Proposals in 2011 Impacting CAT • • H. B. 10 – As Introduced H. B. 18 – As Introduced S. B. 47 – As Introduced H. B. 220 – As Introduced H. B. 261 and S. B. 188 – As Introduced S. B. 184 – As Introduced S. B. 206 – As Introduced H. B. 327 – As Introduced Ohio
Two Ohio Amnesty Programs • Current Use-Tax Amnesty Program – 10/1/2011 to 5/1/2013 – Companies that enter the program must remit all use taxes incurred since January 1, 2009 – Waiver of interest & penalties and prior periods liability forgiven – can enter into payment plan • General Amnesty Program – 5/1/2012 to 6/15/2012 – In general, allows taxpayers to resolve tax liabilities that are paid to the Ohio Department of Taxation – Must pay all taxes due as of May 1, 2011 plus ½ interest – Penalties and remaining ½ interest will be waived Ohio – No payment plan is available
Ohio BTA Report & Budget Situation • BTA has been flooded with a record number of appeals – Most are property tax appeals (80% to 90%). – The Committee anticipates the number of appeals pending before the BTA will exceed 10, 000 by the end of FY 2012. • The Commissioner’s proposals include the following: – – – Creation of a small claims process Acceptance of the Backlog Assistance Program Improvement of the BTA’s current technology Development of a formal Case Management Program Adoption of uniform rules of practice and procedure for county boards of revision • Ohio Projected Budget Shortfall FY 2011 - $3 billion (according Ohio to Center on Budget and Policy Priorities)
Nexus - Three Statutory Tests • Physical presence of more than one day during the tax year, or • Active solicitation of sales in Michigan and $350, 000 or more in gross receipts sourced to Michigan, or • An ownership interest or beneficial interest, either direct or indirect in one or more a flowthrough entities that has substantial nexus. Michiga
Certificated Credits • Definition includes MEGA and other discretionary payroll based credits – – – Election required Retain credit, stay on MBT Forgo credit, file under CIT Election in place until last $ of credit is used Election must be made on first return • Brownfield and State Historic credits have a cash-out mechanism at. 90 – No requirement to stay on MBT Michiga
Unitary Business Group • Definition differs from MBT definition • Only includes “C” corporations, insurance companies or financial institutions – Does not include a “foreign operating entity, ” defined same as under MBT Michiga
Withholding – For Entities • New to Michigan • Applies to flow through entities if > $200, 000 of business income after allocation or apportionment • Withheld from the distributive share of the business income of the member • Members of a flow through entity that are also flow through entities are also required to withhold. • Credit will be given for withholding by lower tier flow-through entity Michiga
Timeline 12/31/06 2/31/07 12/31/08 12/31/09 12/31/10 12/31/11 1/1/12 -12/31/12 SBT MBT CIT • • Many SBT Tax Years Open MBT Audits Only Recently Begun MBT Tax Years Open as Late as 12/31/2016 Election to continue under MBT – Certificated credits Michiga
SBT Apportionment • • • Cost of Performance (TPP vs SVC) Sales Representation Population Factor Destination Michiga
SBT • • MTC Election SBT Nexus SBT CAD SBT Unitary Michiga
Hawaii Developments Mr. Kurt Kawafuchi Former Director, Hawaii Department of Taxation Hochman, Salkin, Rettig, Toscher, & Perez Honolulu, Hawaii
HAWAII Act 105: Suspension of General Excise and Use Tax Exemptions and Deductions • Suspends many exemptions and deductions for 2 years: 7/1/11 through 6/30/13 – e. g. , subcontractor and sublease deductions, sales of TPP to federal government • Grandfather Rule (TIR 2011 -10) – Written contract prior to 7/1/11; Prohibit tax increase • Reporting Requirement (TIR 2011 -4) • Many exempt organizations not impacted by suspension (TIR 2011 -01)
HAWAII Act 1: Civil Unions • Treated Like married couple – Income Tax – Estate and Transfer Tax – Tenants by Entirety? – Family Law – Health insurance and employee benefits – Federal Differences • Effective 1/1/2012
HAWAII Act 161 Permitted Transfers for Trusts • Eliminated 1% tax • Removed 25% restriction on maximum percentage of assets that can be transferred to such trusts • Relaxed Asset Type: Now virtually any type of asset
HAWAII Comp. USA v. Director of Taxation • Hawaii Supreme Court in a published opinion: Comp. USA liable is for 0. 5% use tax (wholesale tax rate, i. e. , resale of inventory) on “keeping the property (inventory)” in Hawaii for “sale. ” Reversed unpublished intermediate Court of Appeals Decision in favor of taxpayer. Government had initially prevailed at trial level.
Missouri Developments Mr. John Barrie Partner Bryan Cave LLP New York City, NY Washington, DC
MISSOURI – Reduced Sales Tax On Food Purchases Found Not To Apply To Sales of Donuts • Krispy Kreme Doughnut Corporation v. Director of Revenue, Missouri Administrative Hearing Commission, December 23, 2010 • Good News: donuts eligible food • Bad News: lower sales tax rate not applicable if more than 80% of donuts sold for “immediate consumption” • “immediate consumption” means “without further preparation” not “immediately consumed”
MISSOURI – Theater Concession Food Sales not Subject To Reduced Sales Tax Rate • Wehrenberg, Inc. v. Director of Revenue, Missouri Supreme Court, October 4, 2011 • Only food sold for home consumption qualifies for reduced sales tax rate
MISSOURI – Taxpayer Not Liable For Use Tax On Purchase of Parts Used In Contracts With Federal Government • Custom Hardware Engineering and Consulting, Inc. v. Director of Revenue, Missouri Administrative Hearing Commission, December 2, 2010 • Under applicable Federal Acquisition Regulations, title to parts pass directly to federal government • Compare purchases pursuant to non-federal government contracts – purchase of parts would be subject to use tax
MISSOURI – Taxpayer Lacked Standing to Challenge Constitutionality of a Tax Credit • Barbara Manzara, et. al. v. Director of Revenue, Missouri Supreme Court, August 2, 2011 • Taxpayer challenged Distressed Areas Land Assemblage Tax Credit Act on basis allowance of the tax credits provided an unconstitutional grant or lending of public money to private persons • No standing -- test is whether a direct expenditure of funds -- tax credits do not involve a direct expenditure
Section 338(h)(10) Developments
2011 District of Columbia Developments • Combined reporting required for taxable years beginning after December 31, 2010 • However, cannot offset losses • Double–weighted sales factor • Internet sales tax
Maine / New Hampshire Developments Mr. Jonathan Block Partner Pierce Atwood LLP Portland, Maine
Massachusetts Developments Mr. Jason Zorfas Executive Director, Indirect Tax Services Ernst & Young LLP Boston, Massachusetts
Maine: Act to Promote Fair and Efficient Resolutions in Tax Disputes CURRENT ADMINISTRATIVE APPEAL SYSTEM • Not independent • Hearing officer employed by Maine Revenue • Decision must be approved by numerous people, including Audit Division • Ex Parte communications encouraged • Little emphasis on settlement • De Novo review to Superior Court
Maine: Act to Promote Fair and Efficient Resolutions in Tax Disputes NEW SYSTEM • More independent hearing officers, appointed by Commissioner of Finance not State Tax Assessor • Charged with making an independent determination based on the law and the evidence • Ex parte communications prohibited; sign-offs eliminated • Settlements encouraged • Still entitled to de novo review by Superior Court • Takes effect July 2012 • New taxpayer advocate position created by Legislature to assist taxpayers in dealing with Maine Revenue
Disrespecting Professional Corporations Luker v. Assessor • • • Maine law firm with a few partners resident in New Hampshire NH resident partners each formed PCs to hold their partnership interest and became employees of their PC’s Result was that the Maine income tax liability of the partners was cut-off due to the fact that the PC’s had little or no income, and the NH partners were nonresident employees of the PC’s Maine Revenue assessed the individual partners as if the PC’s did not exist and as if the NH residents were still partners of the law firm Maine Supreme Court upheld this treatment under Assignment of Income theory, as if the NH residents had assigned partnership distributions to their PC’s Court left room to argue in a case with better facts
Aircraft Use Tax • Maine Revenue launched program of assessing use tax on private aircraft that landed in Maine • The tax was challenged on constitutional and statutory grounds • Two test cases decided by the Maine Supreme Court • Statute exempted sales of property “purchased and used” outside the State of Maine • Court held that use tax did not apply if plane was substantially used outside of Maine CASE A: Aircraft present in Maine for 21 days. Held substantially used outside of Maine. Assessment overturned. Blue Yonder v. State Tax Assessor. CASE B: Aircraft present in Maine for 156 days, outside for 209 days. Held not substantially used outside of Maine. Assessment upheld. Victor Bravo v. State Tax Assessor. Aircraft and parts now entirely exempt under recent Legislation.
New Hampshire Developments: Reasonable Compensation Deduction • • • Because NH has no personal income tax, reasonable comp deductions were frequently audited by NH DRA New legislation applies to reasonable comp deduction allowed to owners of partnerships, LLC’s, sole proprietorships that file as a partnership Shifts burden of proof to Department to show that the amount of the deduction was not reasonable under certain circumstances Adopts IRC section 162 standards (including regs, rulings and court cases) to determine amount of the deduction Once business proves that person actually provided personal services to the business during the tax period, the amount of the claimed deduction is deemed reasonable unless the Department proves by preponderance of the evidence that the deduction claimed by the business organization is clearly unreasonable Business must still maintain records necessary to determine comp deduction was reasonable, unless it elects record-keeping safe harbor (up to $50, 000 deduction). Laws 2011, c. 207
Massachusetts Developments Mr. Jason Zorfas Executive Director, Indirect Tax Services Ernst & Young LLP Boston, Massachusetts
Combined reporting TIR 10 -16 (4 April 2011) – Guidance on the tax treatment of a foreign corporation with US income exempt from federal tax pursuant to a bilateral US Income Tax Treaty – Income of foreign affiliates not subject to US income taxation under a treaty or the IRC is not included in combined income – Apportionment factors and deductions relating to such income are disregarded – Such income is counted for purposes of determining the inclusion of the foreign affiliate in the group under the 20% gross income test – Foreign corporations whose income is excluded may still be required to file returns and pay non-income tax on a separate company basis
Net operating loss deductions Massachusetts – Rev. Directive 10 -5 (9 September 2010) – Provides guidance on the application of the NOL carry forward limitation in the combined reporting regulations where the member’s losses were incurred in tax years when it was subject to a different apportionment method (e. g. , ssf vs. three factor). – Directive requires use of current year method to determine limitations. – S. B. 2582 (enacted 5 August 2010) – Extends the NOL carryforward period from five years to 20 years, effective for tax years beginning on and after 1 January 2010
Recent cases – Kimberly-Clark (Mass. App. Tax Bd. ) – Department of Revenue properly disallowed deductions for interest, royalty and rebate expenses related to taxpayer’s cash management system – Talbots Inc. (Mass. Ct. App. ) – Retailer not entitled to deduct royalties paid to a wholly owned Intangible Holding Company for use of its trademarks because the transactions were shams – IDC Research (Mass. App. Ct. ) – Parent company is liable for corporate excise tax on royalty income received by the holding company because that transaction at issue is a sham, lacking economic substance and a valid non-tax business purpose – Sysco (Mass. App. Tax Bd. ) – Department of Revenue properly disallowed interest expense deduction in a cash management system where there was no written note and no evident intention to repay
Legislation • Reduced rates for corporations (8. 25% for 2011 and 8% for 2012) and financial institutions (9. 5% for 2011 and 9% for 2012). Rate also reduced for S corporations. – Legislation postpones availability of “FAS 109” (relating to certain increases in deferred tax liability caused by the adoption of unitary taxation) to 2013 tax years. Originally the deduction was available over seven tax years beginning in 2012. – Legislation reduces interest on underpayments where audit takes longer than 18 months: • 2 percentage point reduction for 18 -36 months • 2. 5 percentage point reduction for 36 months and thereafter • Taxpayer must respond to audit requests with “reasonable promptness and completeness” • Effective for audits beginning on or after 1 July 2011
Legislation (cont. ) • Proposed bill H. 1731 – New York style affiliate nexus – Applicable only if gross receipts from sales to MA residents referred to the retailer exceed $10, 000 during the prior year
Filing issues – Seven month extension for combined report filers. Taxpayers have to apply for the extension. Rev. Directive 11 -5. – Legislation allows refund claims to be filed within three years of filing date. Under prior law refund claims had to be filed within three years of original due date. Effective for all tax years that were open to refund claims as of 1 July 2011
Year End Considerations Securities Corporations – Securities Corporation – No Net Worth Tax, 1. 32% Tax on Gross Income – Draft Directive 11 -XX places estrictions on the ability to pledge the stock of security corporations • Effective 10/1/2011, parents of security corporations may not pledge more than 50% of security corporation’s stock and may not pledge to restrict the scope of investments or activities of the security corporation • Draft Directive permits a security corporation to sell appreciated assets acquired from affiliates to third parties without losing its status as a security corporation. Security corporation must have purchased the stock for investment purposes and not for tax planning purposes
Year End Considerations Manufacturing Corporations – Manufacturing Classification • Benefits: Investment Tax Credit, Sales/Use Tax Exemptions for Certain Purchases Used in R&D • Qualification: Substantially Engaged in a Qualifying Manufacturing Activity in the State • Deadline for Application as a Classified Manufacturing Corporation: January 31, 2010
Sales Tax Letter Ruling 11 -2 – Charges for core on-line service offerings, which allow customers to access the company's database containing commercial information about the financial condition of businesses, and updated data packages, which allow customers to access additional data, are not subject to Massachusetts sales tax – Sales/use tax, however, applies to charges for workflow add-ons (including a decision making tool, an on-line credit application, a collection tool, an account manager, and web services), as the sale of a right to use prewritten software that is hosted by the company or a third party server – The distinction between the taxability of these transactions, the Department of Revenue explained, is that the object of the core service offerings and the updated data packages is to obtain information, while the object of the workflow add-ons is to access the company's software for the purpose of manipulating information that the
Sales Tax (cont. ) Letter Ruling 11 -3 – Sales of authentication services through a digital certificate are not subject to sales and use tax when provided to customers located in Massachusetts. Letter Ruling 11 -4 – Charges to access online database to obtain information and reports (without the licensing of the software) is not subject to sales and use tax. – In essence, if the service in question is a passive exchange of information rather than software actively manipulated and controlled by the end user, it may not be subject to Massachusetts sales and use tax
Sales Tax (cont. ) Letter Ruling 11 -5 – Pharmaceutical compounds shipped to fill/finish manufacturers that placed the compounds in vials and shipped them out of state were not subject to use tax, as the compounds were in MA only temporarily. Letter Ruling 11 -7 – Solar powered electrical generation equipment installed on roof of office building qualifies for exemption as equipment used in the furnishing
Sales Tax (cont. ) DOR Directive 11 -2 – Effective 1 July 2011, the sales price of cell phone sold in a bundled transaction that includes taxable telecommunications services, is the higher of the amount paid by the customer or the vendor’s wholesale cost of the phone/device • The vendor can charge the retail customer for the tax based on the sales price • If the customer is charged, the tax must be separately stated on the bill to the customer (Mass DOR Directive 11 -2, 27 April 2011) – Working Draft Directive 11 -XX – Sale of third party coupons (e. g. , “Groupon”) is not subject to sales or use tax. Tax is imposed on the full sales price (including the value of the coupon plus additional out-of-pocket consideration)
FEATURING SPECIAL GUESTS: Mr. James Wetzler Mr. Richard Genetelli Director, Multi-State Tax President Group The Genetelli Consulting Deloitte Tax LLP Group New York, New York Mr. David Shipley Partner Mc. Carter & English, LLP Philadelphia, Pennsylvania
NY Sourcing Rule for Electronically Provided Services • TSB-A-11(8)C treats electronic trading fees and clearing fees as Other Business Receipts sourced based on customer location. • TSB-A-11(1)C treats debit card processing as Other Business Receipts, revoking TSB-A-95(13)C, which treated credit card processing as a service sourced to where the NY
NYC Treatment of Alternative Investment Managers • NYC Unincorporated Business Tax treats “trading for one’s own account” as not being a business subject to tax. For alternative investment managers, this serves to exempt partnerships that own carried interests. • NYC officials have informed practitioners that it will insist on attribution of expenses to these carried NY
NYS Treatment of Leveraged Buyouts • NYS auditors are increasingly challenging interest deductions associated with leveraged buyouts. – Challenges to deductions for interest on intercompany debt. – Challenges to debt pushdowns – Challenges to interest deductions on thirdparty indebtedness when incurred to purchase target company stock. NY
New York State and City Combined Reporting Update • Budget Deficits • Significant audit activity –Forced combination –De-combination • Prior law –Ownership –Unitary business –Distortion • Amended Law –De-emphasize transfer pricing New
New York State and City Amended Combined Reporting Rules* • Ownership • Substantial Intercorporate Transactions –Intercorporate receipts –Intercorporate expenditures –Intercorporate asset transfers • TSB-M-08(2)C – 10 -step process to determine companies to be included in a combined group • Timing Difference Between State and City –Potential in interim period for different outcomes * Effective for tax years beginning on or after 1/1/2007 for New York State and on or after 1/1/2009 for New York City New
New York State and City Combined Reporting Controversies • Unitary Business –Separate lines of business –Centralized management –Holding companies • Distortion –How much is needed • Intercompany Relationships –Business purpose –Economic substance • Computational Issues –Sale of a subsidiary • Bausch & Lomb • TSB-M-08(3)C New
New York State and City Combined Reporting Evaluation • Tax Impact – Current year – Future years – Prior years open under statute of limitations • Which Companies are to be Included – Limited combinations • Lines of business • Divisional operations • Unitary Relationships • Intercorporate Transactions • Documentation • Retroactive Combination New
New York State Withholding Tax Audit Initiative • Hot Issue –Bright-line standard – 14 day rule –Implications of Form IT-2104. 1 –Potential penalty for noncompliance –Interrelationship with personal income tax audits • Political issue relating to noncompliance for key executives • Planning Strategies –Assess prior exposure –Procedural controls –Documentation New
PA – Important Bulletins • Miscellaneous Tax Bulletin 2011 -01 changes the Department of Revenue’s policy regarding the filing of security in Commonwealth Court appeals. Taxpayers can submit their most recent financial statements in lieu of filing security with the court. • Miscellaneous Tax Bulletin 2011 -02 permits the Board of Appeals to compromise certain appeals based on doubt as to liability or “the promotion of effective tax administration”. Different levels of approval are required depending on the amount of relief granted in compromise. • Sales and Use Tax Bulletin 2011 -01 advises remote sellers that certain activities will be sufficient to establish nexus for sales and use tax purposes. Remote sellers who register prior to February 1, 2012 will be able to comply on a prospective basis. PA, NJ
PA – Glatfelter Pulpwood Company • In 2004, the taxpayer sold timberland in Delaware for a $56 million gain. • Taxpayer argued the gain was nonbusiness income because it constituted a partial liquidation. • The court rejected that argument finding that the proceeds were not distributed to Glatfelter’s parent and that the sale was not a partial liquidation of the taxpayer’s business because the taxpayer still owned and maintained 14, 364 acres of timberland in Delaware. • The Court didn’t rule on whether the 2001 statutory change to the definition of business income was an amendment or a clarification but addressed that issue in a footnote. PA, NJ
PA – Whirlpool Properties • Court found that throwout rule would be unconstitutional to the extent that it applies to states that choose not to impose an income tax. • Court then interpreted throwout rule not to apply to those states that choose not to impose an income tax. • Court concluded that throwout rule as interpreted was facially constitutional. • Court’s decision is logically inconsistent in regard to P. L. 86 -272 and states that do not assert intangible nexus. • There may be implications to foreign jurisdiction that do not impose tax based on tax treaties. PA, NJ
NJ - BIS • Appellate Division affirmed Tax Court’s decision that BIS did not have nexus based on merely owning a limited partnership interest in a partnership doing business in New Jersey. • Court’s decision was based on finding that BIS was not unitary with partnership. • Court rejected a myriad of arguments from Division. • Court remanded case to Tax Court to address whether the corporate partner is entitled to a refund of taxes paid by the limited partnership despite the issue being raised in the Division’s reply brief based on “the public interest in the matter. ” PA, NJ
NJ - IBM and Creston • The Division added back the taxpayers’ extraterritorial income under IRC § 114 based on the Division’s regulation which provides that “[i]ncome from sources outside the United States that was not included in federal taxable income… must be added back to a corporate entity’s federal taxable income to calculate the entity’s entire net income for corporation business tax purposes. ” • The Tax Court held that the income was excluded under N. J. S. A. 54: 10 A-4(k) entire net income is deemed to be equal to the federal taxable income before the net operating loss and special deductions. PA, NJ
![TAM 6 and TAM 17 • TAM-6 provides that “[t]axpayers performing services and domiciled](https://present5.com/presentation/e2007b9bbf018a3e2eedc8f27553fe5b/image-122.jpg "TAM 6 and TAM 17 • TAM-6 provides that “[t]axpayers performing services and domiciled")
TAM 6 and TAM 17 • TAM-6 provides that “[t]axpayers performing services and domiciled outside the State that solicit business within the State or derive receipts from sources within the State must file a CBT return and pay applicable taxes to New Jersey. ” TAM-6 noted that the expanded nexus standards were enacted in 2002. • TAM-17 provides that the Division will apply generally apply federal 482 standards in making adjustments between related entities. PA, NJ
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