Transcript Document

What’s
Happening
Tuesday
December 16, 2008
Hosted by
Ginny
Buckner Kissling
Meredith
Vieira
Principal, Ryan, Inc.
&
with
Fred Marcus
MattMarcus,
Lauer
Principal, Horwood,
and Berk, Cht.
Doug Lindholm
& William McArthur
Chris Matthews
&
Council on State Taxation
Tyco Electronics
Tom Brokaw
Program
Jack Harper, North Carolina
Bruce Ely, Alabama
Jonathan Block, Maine / New Hampshire
Jeff Saviano, Massachusetts
Tom Steele, California
Mark Eidman, Texas
Fred Nicely, Ohio
Pat Van Tiflin, Michigan
Program
Kurt Kawafuchi, Hawaii
John Barrie, Missouri
Dale Busacker, Minnesota
Jason Wyman, Illinois
James Wetzler, New York
Dick Genetelli, New York
David Shipley, Pennsylvania / New Jersey
NEWS
BREAK
Presented by
Bill Townsend
Partner
Fowler White Boggs
Banker LLP
Marc Simonetti
&
Associate
Sutherland Asbill &
Brennan
FEATURING SPECIAL GUESTS:
Mr. Mark Eidman
Partner
Scott, Douglass & McConnico LLP
Austin, Texas
Mr. Fred Nicely
Tax Counsel
Council On State Taxation
Washington, DC
Mr. Patrick Van Tiflin
Partner
Honigman, Miller, Schwartz, and
Cohn LLP
Lansing, Michigan
FEATURING SPECIAL GUESTS:
Mr. James Wetzler
Director, Multi-State Tax Group
Deloitte Tax LLP
New York, New York
Mr. Richard Genetelli
President
The Genetelli Consulting Group
New York, New York
Mr. David Shipley
Special Counsel
McCarter & English, LLP
Philadelphia, Pennsylvania
PowerPoint Presentation
To access this presentation, go to:
www.ryanco.com
or
www.saltlawyers.com
North Carolina Developments
Mr. Jack Harper
Vice President, Corporate Tax
Wachovia Corporation
Charlotte, North Carolina
Wal-Mart Stores East v. Tolson, 06 CVS 3938
Sam’s East v. Tolson, 06 CVS 3929
• North Carolina Department of Revenue forced
combination of Wal-Mart Stores, REIT and REIT
Holding Company
• Disallowed REIT’s dividends paid deduction and
REIT Holding Company DRD
• Wal-Mart sues for refund
• Extensive Wall Street Journal Coverage on Tax
Advice Received from Ernst & Young
Wal-Mart Stores East v. Tolson, 06 CVS 3938
Sam’s East v. Tolson, 06 CVS 3929
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Trial Court Rules Against Wal-Mart on all Counts
Wal-Mart appeals to N.C. Court of Appeals.
Oral Arguments held Late October 2008
Decision expected January 2009
In the Matter of the Summons Issued to Ernst & Young, LLP et al.;
No. COA07-1219, North Carolina Court of Appeals (August 5, 2008)
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NC Department of Revenue Issues Summons to E&Y to Produce
Documents
Work Product Privilege Claim Rejected by Trial Judge
Wal-Mart Intervenes and Appeals to NC Court of Appeals
Documents Remanded Back for in camera Review
Appeals Court Rules Summons is Subject to Rules of Civil
Procedure
DOR Appeals to NC Supreme Court on Rules of Civil Procedure
Issue
Other North Carolina Developments
• Franchise Tax Changes for REITs (no reduction
to capital stock base for aggregate market value
of investments).
• Corporate Tax Return Due Date Changed.
• Guidance Issued for Alternative Apportionment
Requests.
Alabama Developments
Mr. Bruce Ely
Partner
Bradley Arant Rose & White LLP
Birmingham, Alabama
Recent Developments in Alabama
• Never-ending Franchise Tax Litigation -- is there
finally an end (a refund) in sight? Vulcan Lands,
Inc. v. ADOR
• Add-Back Statute Litigation and Legislation -- VFJ
Ventures, Inc. v. ADOR and Alabama Act 2008-543
• Facially Discriminatory Business Privilege Tax
Deduction -- AT&T Corp. v. ADOR
Recent Developments in Alabama
• Business/Non-business/Non-unitary Income Resulting
from Stock Sale: Tate & Lyle Ingredients Americas,
Inc. v. ADOR
• Is Unitary Combined Reporting Coming to Alabama?
An update and some very unofficial predictions
• Bad Debt Sales Tax Litigation: Does anybody get the
deduction? Home Depot USA v. ADOR/Wells Fargo
Financial v. ADOR
NEWS
BREAK
Maine / New Hampshire Developments
Mr. Jonathan Block
Partner
Pierce Atwood LLP
Portland, Maine
Massachusetts Developments
Mr. Jeffrey Saviano
Northeast Director of State and Local Tax
Ernst & Young LLP
New York, New York /
Boston, Massachusetts
Maine: Aircraft Use Tax
• Assessing 5% Use Tax on Aircraft that Land in Maine
• There are several possible statutory exemptions, but
M.R.S. is interpreting them as applying only to in-state
purchases of aircraft
• M.R.S. interpretation discriminates against interstate
commerce
• Many court challenges pending
• Applies also to yachts
Instrumentalities of
Interstate/Foreign Commerce
• Maine has exemption for buses, trucks, ships, aircraft,
etc.
• Superior Court decided that exemption must be limited
to only those situations where tax would be
unconstitutional
• Cyr v. State Tax Assessor
• Would make almost every instrumentality taxable
• Amicus Brief; State changes position
• Maine Supreme Court decision pending
Constitutional Issue
May Be Raised at Any time
• State v. Thompson
• Taxpayer failed to appeal residency issue in a timely
manner
• State filed collection action
• Taxpayer attempted to raise non-residency as a
defense
• Maine Supreme Court: Residency issue could be
collaterally attacked notwithstanding failure to appeal
underlying assessment
Thompson
• Court:
– Res Judicata requires a “valid judgment”
– Failure to allow collateral attack would allow the
State to tax individuals it is constitutionally and
statutorily prohibited from taxing
• Could apply to other constitutional issues
Apportionment: Nelnet v. Assessor
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Student Loan company
Assessor argued that interest and servicing
fees were Maine numerator sales because
they were “incidental” to sales made in Maine;
i.e. loans disbursed to Maine colleges
Maine/MTC Rule: “interest income, service
charges, …incidental to a sale must be
included as sales in the state to which the sale
is attributable…”
Nelnet Case
• Superior Court: Interest income not incidental to
a “sale”. A loan is not a sale. Loan income (i.e.
interest) is not incidental to any sale. It is the
predominant purpose of the transaction
Income Producing Activities
• Court: Only activities of the “taxpayers” (i.e.
Maine-nexus members of the unitary group) may
be considered in analysis
• Me Rule: IPA does not include activities
performed on behalf of taxpayer, such as those
performed by independent contractor
• Assessor: Activities performed by employees of
non-nexus unitary business entities may not be
considered
Nelnet
• Nelnet: Rule excluding IC’s from consideration
in determining IPA inconsistent with IPA statute.
No such limitation in statute.
• Court: Activities of employees of other group
members are not akin to activities of an IC and
must be included in IPA analysis
Nelnet
• Summary
• Interest income not “incidental” to a Maine sale
• Only Maine-nexus corporations of UB are considered
for purposes of determining IPA
• Activities of employees of other group members
performed on behalf of Maine-nexus entities are
considered
• COP was greater in another State; therefore not Maine
sales
• Subject to appeal
Alternative Apportionment Formulas
• Assessor pushing hard
• E.g., entertainment producers
– Apportionment by audience
• Case by case basis; no rules
• Penalties for failure to anticipate
New Hampshire Equal Protection Case
• Verizon v. City of Rochester
– City imposed a property tax on Verizon for license of
public ways (pole licenses)
– City did not impose this tax on other similarly situated
utilities
– No rational basis for this selective taxation
– Statute, as applied to Verizon, was unconstitutional
Massachusetts Legislation
• Adoption of Unitary Reporting Required for Tax Years
Beginning on or After 1 January 2009
– 50% ownership threshold.
– Unitary business broadly defined
– Tax imposed on a “water’s edge” basis
• Certain foreign affiliates included
• Ten year election to use worldwide group
• Ten year election to include non-unitary members of
federal affiliated group
Massachusetts Legislation
• Adoption of Unitary Reporting (continued)
– Finnigan approach adopted
– NOLs carried forward on a post-apportionment basis
• Pre-unitary NOLs can be used only by the company that incurred the loss
– Deduction for FAS 109 impact of unitary reporting
• Phased in Rate Reductions for Corporations
• Entity Classification Conformity Starting with 2009 Tax Years
– Applies to MBTs and partnerships (LLCs already conform)
– Transition rules will tax previously untaxed MBT income
– S corporation / QSUB Consolidation
Massachusetts Legislation
• Public Law 86-272 no Longer Applicable to Non-Income Measure
of the Excise
• Massachusetts Specific Basis Rules Adopted
• Goodwill Eliminated from Massachusetts Sales Factor
• Incentives for Life Sciences Companies
– Administered by the Life Sciences Center
– Maximum annual benefit: $25M per year
– Incentives include: FDA user fee credit, ITC, research credit, throwback
relief, expanded NOL, orphan drug deduction, sales tax exemptions, R&D
classification, additional cash grants and loans
California Developments
Mr. Thomas Steele
Partner
Morrison & Foerster LLP
San Francisco, California
California in Economic Crisis
• As of September, 2008
– Projected State Budget Shortfall for 2008-2009: $15 billion
– Three way struggle:
• Assembly Republicans (“Cut expenditures”)
• Assembly Democrats (“Raise taxes”)
• Governor (“Structural reform required”)
– Solution:
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Spending cuts
Borrowing
Accelerate tax revenues
Commission to Study Alternatives : Report due April 15, 2009
– Professor Pomp appointed to Commission
Steps to Accelerate Tax Revenues
• New Strict Liability Penalty for Underpayments of
Corporate Tax (R&T Code sec. 19138)
– Understatement in any taxable year in excess of $1 million
• Taxes of members of combined group to be aggregated
– Taxable years beginning on or after 1/1/03
– Penalty of 20% of entire understatement
– Understatements applicable to tax years beginning before
1/1/08 may be eliminated by amended return and payment
before 5/31/09
– Relief only if FTB erred in computing penalty amount
Steps to Accelerate Tax Revenues
• New penalty in addition to other penalties
• Not applicable if due to “change of law” or
reliance on written legal ruling by the Chief
Counsel
Steps to Accelerate Tax Revenues
• Example
– Taxpayer XYZ suffers $100 million asset loss in 2003
– Responding to prior Amnesty Penalty, XYZ overpays 2003
tax and files a California claim for refund for $10 million
– Pending resolution of claim, XYZ continues to claim in 2003
and later years amortization deductions of $10 million per
year (worth $1 million in California taxes) relating to asset
that became worthless acknowledging such deductions will
be reversed when claim is granted
Steps to Accelerate Tax Revenues
• Example (continued)
– Assuming 2003 claim is granted in full by FTB in 2010:
• FTB owes XYZ $10 million (plus interest) for 2003
• XYZ owes $7 million (plus interest) for understated
income for 2003 – 2009
• Despite a net refund due, XYZ apparently owes $1.2
million (20% of $6 million) in penalties
• Only offsets which occur in the same year reduce penalty
Steps to Accelerate Tax Revenues
• NOLs Suspended for 2 years (1/1/08-1/1/10)
– Carry over period increased for suspension
– Move to 20 year period
– NOL carry back starting 2011
• LLC Fee accelerated to June of current tax year
• Temporary 50% limits on credits (2008-2009)
Steps to Accelerate Tax Revenues
• Modification of Federal Estimated Taxes Rules
(R&T Code secs. 19125 & 19136.3)
– Early period quarterly installments now exceed 25%
– 90% of prior year’s income doesn’t apply to AGI of
$1 million or more
– Applicable to tax years beginning on or after 1/1/09
Continuing Economic Crisis
As of December 4, 2008
– Projected additional budget shortfall of $11 billion
– Discussion of New Taxes: Governor’s proposal
• 1.5% increase in state sales tax (for three years) to create nation’s highest
sales tax (8.75% to 10.75% depending upon the district)
• Expansion of sales tax to cover certain services (e.g. appliance and furniture
repair, amusement fees, vehicle repair, amusement parks, sporting and golf
fees, veterinary services).
• An oil severance tax of 9.9 percent of gross value of oil produced in
California. Low-value stripper oil would be exempt, as would oil owned or
produced by the state or local governments
• Increases excise taxes on alcoholic beverages by the equivalent of a nickel a
drink (1.5 ounces of spirits, 12 ounces of beer, or 5 ounces of wine), effective
March 1, 2009
– Other alternatives under discussion
LLC Litigation
• Ventas Finance I, LLC v. FTB, 165 Cal. App. 4th
1207 (2008)
– Follows Northwest Energetic
– LLC fee a tax, not a fee
– Under Complete Auto must be apportioned rather
than based on 100% of gross receipts wherever
earned
– Taxpayer stipulated to proper apportionment
percentages for income tax
LLC Litigation
• Ventas Finance I, LLC v. FTB, 165 Cal. App. 4th
1207 (2008) Continued
– Court adopted those apportionment percentages to
determine the lawful tax v. unconstitutional amount
to be refunded
– Attorney fees under CCP sec. 1021.5 but remanded
to see if taxpayer still a “successful party” and as to
amount
– Taxpayer’s petition to the California Supreme Court
was denied
Gross or Net Receipts in Sales Factor
• Continuing confusion despite (or because of)
Cal. Supreme Court’s decisions in Microsoft and
General Motors
– What is debt and what is marketable security?
• FTB fix? See Regulation 25137(c)(1)(D) (gross receipts
from treasury function activity to be thrown out of sales
factor unless taxpayer establishes taxpayer demonstrates
this treatment creates distortion)
Gross or Net Receipts in Sales Factor
• Continuing confusion despite (or because of)
Cal. Supreme Court’s decisions in Microsoft and
General Motors
– What is distortion?
• Qualitative v. Quantitative distortion
• Super-unitary test?
• Compare profit margins where activities are not “Superunitary”
Gross or Net Receipts in Sales Factor
• General Mills, Inc. v. FTB, No. 439929 (Cal. Super.
Ct., SF County, 9/26/2007), appeal pending
– Gross Receipts from commodity sales in futures
market not “true sales” because not binding
obligations, have no value at inception and not
driven by profit motives
• Inconsistent with factual record, long legal history of futures contracts
and federal tax treatment
• Inconsistent with California Supreme Court’s decision in Microsoft
holding that sales of marketable securities generated “gross receipts”
Gross or Net Receipts in Sales Factor
• Microsoft v. FTB II (Sup. Ct. SF County)
– Distortion cuts both ways: e.g., no intangibles in the
property factor
Retribution
• Hyatt v. FTB, No. A382999 (Nev. Dist. Ct., 8th
Dist., 8/6/08)
– Follows decision by U.S. Supreme Court that
California FTB not immune from suit for tortious
conduct in Nevada
– Jury award of $138 million in compensatory
damages
Retribution
• Hyatt v. FTB, No. A382999 (Nev. Dist. Ct., 8th
Dist., 8/6/08)
– Jury award of $250 million in punitive damages
– Based on evidence of outrageous auditor conduct
including
• sifting through Hyatt’s trash
• unfounded accusations to Hyatt’s friends
• religious slurs
What’s
Happening
Tuesday
December 16, 2008
FEATURING SPECIAL GUESTS:
Mr. Mark Eidman
Partner
Scott, Douglass & McConnico LLP
Austin, Texas
Mr. Fred Nicely
Tax Counsel
Council On State Taxation
Washington, DC
Mr. Patrick Van Tiflin
Partner
Honigman, Miller, Schwartz, and
Cohn LLP
Lansing, Michigan
Margin Tax Uncertainties
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What is included in “total revenue”?
What is included in “cost of goods sold”?
What is included in “compensation”?
Do I qualify for a specific revenue deduction?
Do I qualify for the lower tax rate for retailers and
wholesalers?
Texas
Total Revenue
• The starting point for the total revenue
calculation is line 1c of the federal return
• Any methodology acceptable for reporting line 1c
under federal law is acceptable for Texas
franchise tax purposes
• Gross or net reporting may be used
Texas
Cost of Goods Sold
• Includes “taxes paid in relation to acquiring or
producing any material, or taxes paid in relation
to services that are a direct cost of production”
• Does not include “selling costs” or “distribution
costs”
• Is the tax in question a tax on production or a tax
on sales or distribution?
Texas
Compensation
• Includes wages, compensation, and benefits
• Benefits do not include employee discounts,
payroll taxes, or “working condition amounts”
provided so employees can perform their jobs
• What is included in working condition amounts?
Texas
Specific Deductions
• Management companies may exclude
reimbursements of specified costs from total
revenue
• Definition of “management company” is very broad
• The Comptroller intends to issue guidance clarifying
the deduction and excluding shipping companies
Texas
Retailers/Wholesalers
• Tax rate is .5% for entities primarily engaged in retail
or wholesale trade
• Who qualifies?
– Standard Industrial Classification Manual
– Utilities excluded
– Revenue from retail/wholesale trade must be greater than
revenue from other trades, and less than 50% of revenue
from retail/wholesale trade can come from the sale of
products it or an affiliated entity produces
• What does “produces” mean?
Texas
Future Legislative Changes
• Potential legislative changes to be considered during
the 2009 legislative session:
– Apportionment:
• Which standard will be used for unitary combined reports?
– Joyce or Finnegan.
– Certain legislative leaders believe Joyce method is a “loophole.”
– Information from Finnegan reporting requirement.
– Special deductions for certain industries
– Deductibility of 1099 payments.
Texas
Ohio CAT – Revenue
• Gross Receipts tax rate for collection over or under a
10% threshold originally subject to adjustment
• Under current law only over collection subject to rate
reduction and potential refund
– Second measurement period (7/08 to 6/09) just started
• $1.19 billion statutory target @ 110% is $1.31 billion
• Office of Budget & Management (OBM) target was $1.3 billion
– Prior fiscal year (7/07 to 6/08) revenue was $964 million, 3%
below OBM target of $995 million
Ohio
Are the Other Taxes Really
Being Phased Out?
• Last year for general businesses to file a personal
property tax return was 2008; telecommunications
companies have until 2010 and most utilities remain
subject to tax
• Last year for general businesses to file a corporation
franchise tax return is 2009
• Full 21% phase-down of Ohio’s personal property tax
takes place in 2009
Ohio
Is the CAT a Transactional Tax?
What’s the Impact?
• Ohio’s Constitution
– Two provisions address food ($188 million)
• Food for off-premise consumption, and
• Items used to manufacture food or food sold at wholesale, including
packaging
– One provision addresses motor fuel ($139 million)
• Revenue raised from taxes or fees imposed on motor fuel must be spent for
public road projects
• Does it impact state’s economic nexus provision?
• As a transactional tax would it be subject to the Quill physical presence
standard?
Ohio
Future of the CAT
• Weak economy – will the CAT be adjusted to balance the
state’s budget?
• Adverse litigation on food and/or motor fuel
– Increase CAT
– Subject those industries to alternative taxes (e.g., franchise tax and/or property tax)
•
Disfavor of using a Gross Receipts Tax
– Adjustments for pyramiding of tax
– Pressure for tax credits for investments in the state
– Tax based on ability to pay – income based
Ohio
Nexus – Constitutional Issues
• Does in-state physical presence for more than
one day constitute “substantial” nexus?
• Is economic nexus sufficient to establish
“substantial” nexus?
Michigan
Expense Disallowance –
Constitutional Issues
• Does the addback requirement result in
effectively taxing the out of state recipient?
• Does the addback requirement result in taxation
of income that is out of all appropriate proportion
to activity done within the state?
Michigan
Apportionable Income –
Constitutional Issue
• Does the definition of “business activity” include
income that is not constitutionally apportionable
to the state?
Michigan
Unitary Business –
Constitutional Issue
• Does the definition of “unitary group” result in
unfair apportionment of income that is not
constitutionally apportionable to Michigan?
Michigan
Finnigan – Constitutional Issue
• Does inclusion in the sales factor numerator of
in-state sales made by affiliates that do not have
nexus in the state result in unconstitutional
inclusion of income apportioned to the state?
Michigan
State Specific Credits –
Constitutional Issues
• Do state specific credits unconstitutionally
discriminate against interstate activities?
• Do state specific credits result in unfair
apportionment?
Michigan
Administrative Provisions (continued)
• Sec. 205.27a(2) . . . The taxpayer shall not claim a
refund of any amount paid to the department after the
expiration of 4 years after the date set for the filing of
the original return . . .
• Sec. 205.27a(6) Notwithstanding the provisions of
subsection (2), a claim for refund based upon the
validity of a tax law based on the laws or constitution of
the United State or the state constitution of 1963 shall
not be paid unless the claim is filed within 90 days after
the date set for filing a return
Michigan
NEWS
BREAK
Hawaii Developments
Mr. Kurt Kawafuchi
Director
Hawaii Department of Taxation
Honolulu, Hawaii
Agenda
• An in-depth review of significant developments
from the Hawaii region.
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Revitalization and Stimulus Initiatives
Current Developments
Compliance Projects
Pending Administrative Guidance
Governor Lingle’s
5-Point Economic Revitalization Plan
• Increase Tourism Marketing
• Fiscal Stimulus: Investment in Facilities and
Infrastructure
• Lower Fees and Tax Relief
• Attract Capital & Investment: Green or Renewable
Energy Initiatives, e.g., Electric Cars
• Partnerships with Private & Federal Government and
Attracting Federal Funds
Department’s Initiatives
• Encouraging and Stimulating Investment and
Economic Activity
• Creating Fairness and a Level-Playing Field by
Addressing the Tax Gap
• Improving Services, e.g., periodic GE tax forms
Current Developments
• Cash Bond Deposits to Suspend Running of
Interest
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Effective immediately.
Will toll 8.0% interest; but taxpayer earns no interest.
Similar to Rev. Proc. 84-58.
Must make disclosures.
Entitled to return of money.
Accomplished through agreement.
Current Developments
• Elimination of “Pay to Play” Requirement
• All controversies get “one bite of the apple” for free.
• No need to prepay tax to the Taxation Board of Review of
Tax Appeal Court.
• Must pay for second appeal.
• Applies to all taxes.
Current Developments
• Enactment of “Deemed Denial” Statute
• Allows taxpayers to sue for a refund after 180 days of the
date of the claim; provided that notice of denial was not
provided within that period.
• Deemed denials are to be reviewed by the Taxation Board
of Review or the Tax Appeal Court “on the merits.”
• First case litigating under this theory is currently
docketed. (Research Credit controversy)
Current Developments
• Background
• Hawaii does not have a sales tax.
• Rather, it has a gross proceeds general excise tax equal
to 4% of essentially all business transactions.
• Hawaii has a 0.5% wholesale rate on TPP and services.
• A privilege tax on gross income with several exemptions.
• Prior to 2007, no local tax on business proceeds.
Current Developments
• New Legislation
• Law was amended to provide for a 0.5% GET rate for
proceeds from goods or services provided to satisfy a
warranty obligation. Reduces rate from 4.0% to 0.5%.
• Must be a "true warranty," versus an extended warrant
that is more like insurance.
• Effective July 1, 2008.
Current Developments
• Baker & Taylor: Hawaii Supreme Court held that taxpayer had
nexus and upheld 4.0% general excise tax but reversed 0.5% tax
rate
• Hawaii Legislature passed legislation to clarify Baker & Taylor
retroactively to codify a prior administrative rule (i.e., regulation).
This las gave rise to a string of use tax refund cases.
• CompUSA Tax Appeal Court decision
• Prospective Relief in Certain Circumstances
• Modifications post-Baker & Taylor extending the use tax to imports of "sales"
is applied prospectively and also, apply Halliburton principles. Plan to issue a
Tax Information Release.
Current Developments
• Honolulu’s County Surcharge
• First local tax in Hawaii history.
• Prior to January 1, 2007, no local municipality had a tax
on the sales proceeds of a business.
• Applies to all transactions at the 4% rate.
• Effective tax rate with proceeds sourced to Honolulu is
4.5%.
Current Developments
• Honolulu’s County Surcharge (cont’d.)
• Sourcing Rules Developed
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Tangible Personal Property—where delivered
Services—where consumed
Commissions—where services rendered
Rental Personal Property—where property used
Rental Real Property—where property located
Contracting—where job located
Interest—where investment controlled
Theaters and Amusements—where event located
Compliance Projects
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Fairness and Addressing the “Tax Gap”
Apportionment and Multistate Taxpayers
Transfer Pricing Abuse
The Cash Economy
Monitoring Development Elsewhere
– Economic Nexus (MBNA and Lanco)
– Online Travel Company litigation
Pending Administrative Guidance
• Cash Bond Deposits--TIR
• Taxation of the Film Industry—Rules
• Export Incentives/Use Tax/0.5% Wholesale
Transactions—Rules
• Scientific Contract GET Exemption—TIR
• 41(d) Prototype—TIR
• Halliburton Analysis—TIR
Missouri Developments
Mr. John Barrie
Partner
Bryan Cave LLP
Washington, DC
Nexus in Missouri – Sales and Use and Corporate
Income Tax (Letter Ruling LR4643, April 1, 2008)
• Out-of-state sales person travels to Missouri to
generate sales. Most of purchases delivered by
company’s own trucks into Missouri.
• Company required to collect and remit Missouri use tax
on sales to Missouri customers.
• Company subject to Missouri corporate income and
franchise taxes
– engaged in business in Missouri and deriving income from
Missouri sources.
Nexus in Missouri – Instate Advertising
(Letter Ruling LR4702, April 21, 2008)
• Non-nexus vendor did not get nexus by
advertising products in Missouri.
• Vendor did not have any physical presence in
Missouri.
• US mail to deliver products to Missouri
customers.
Electronic Transfers in Missouri – Sales tax exposure?
(Letter Rulings LR5052 and LR5058, August 29, 2008)
• Sales of electronic courses offered via the internet not
subject to Missouri sales or use tax – interactive computer
services and electronic publishing not subject to tax.
• Sales or use tax should be collected on cost of materials
unless the fee for course materials is separately stated and
sales tax collected from attendees.
• Sales of downloadable copyrighted photographs over the
Internet in exchange for a monthly fee not subject to sales
or use tax – not a transfer of tangible personal property.
IRC 1031 “Like Kind” Exhanges – Not eligible for
Missouri “Trade In” Rules if Intermediary Used
• Great Southern Bank v. Director of Revenue, Missouri
Supreme Court November 4, 2008.
• Taxpayer exchanged airplanes through use of a
qualified intermediary that satisfied IRC 1031 “like kind”
exchange rules.
• Taxpayer sought to only pay use tax on increase in
value of new airplane over cost of old airplane under
Missouri’s “trade in” rule.
• Court found two separate transactions – therefore not
eligible for “trade in” rule.
Statute of Limitations –
Saturday means Friday
• Insurance Company of the State of PA, et al. Director of
Revenue et al, Missouri Supreme Court November 4, 2008.
• Out-of –state insurers sought refunds of the tax they
overpaid with respect to insurance premiums. Refund
claims mailed on Friday, June 1, 2007 – received by
Department of Revenue on Monday, June 4, 2007.
• Statute of Limitations expired on Saturday, June 2, 2007.
• Refunds denied as untimely since statute providing for
refund claims did not have either a timely mailing or
Saturday rule.
Fees Paid to Fitness Facility
Subject to Sales Tax
•
Michael Jaudes Fitness Edge, Inc. v. Director of
Revenue, Missouri Supreme Court, April 1, 2008.
Because the fitness facilities constituted a place of
recreation, fees subject to sales tax.
Court found that the distinction between fees paid for
personal training sessions in a place of recreations
(taxable) and fees paid directly to a personal trainer on
an independent basis (nontaxable) a reasonable one
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no violation of Missouri's Constitutional uniformity
requirement
Bowling League
Qualified as a Civic Organization
•
•
Missouri State USBC Association v. Director of
Revenue, Missouri Supreme Court, April 29,
2008.
Bowling league qualified as a tax exempt “civic”
organization because its activities were
recreational and available to public at large.
NEWS
BREAK
Minnesota Developments
Mr. Dale Busacker
Director, State and Local Taxes
Grant Thornton LLP
Minneapolis, Minnesota
What Happened in 2008?
• Streamlined conformity – repeal of the fur tax
• Income tax conformity – through February 13, 2008
• Bonus depreciation – 80% addback and deduct this
amount over five years
• Disallow payments to a governmental agency for
violation of a law
What Happened in 2008?(continued)
• Tax debtor data match
• Corporate Tax Reform Commission - report due
February 15, 2009
• Sales Tax Increase of .375% starting July 1, 2009 to
fund programs to improve the outdoors, water quality,
parks and the arts
• More tax auditors approved
Foreign Operating Corporation
• 80% of income must be from foreign sources
• Addback for payments made to FOC for interest,
royalties, factoring, or for DPD from a captive REIT
• Economic substance
 Grant of authority to Revenue Department
 Provision not enacted
HMN Financial – Pending in Tax Court
•
Minnesota bank owns an FOC which owns a REIT. The
bank contributed one-third of its Minnesota mortgage loan
portfolio to the REIT. Bank dismantled structure within two
months after law was changed in 2005.
•
Department's Position:
•
•
•
Transfer of the loan portfolio to the REIT lacked economic
substance.
Payroll with the bank needs to be imputed to the FOC.
The bank never acted on its business purpose for the REIT or for
the FOC.
BNSF Railway – Pending in Tax Court
•
BNSF Railway owed about $5.5 billion to two of its
subsidiaries located in Canada and which were
FOCs. The Department admits that these two
companies qualify as FOCs.
•
Department's Position:
•
•
The interest payments lack economic substance and business
purpose
No business purpose or economic substance to capitalize these
FOCs with more than $5 billion in intercompany notes
Challenge to JOBZ
•
Olson Case
•
•
December 18, 2007 – Appeals Court said taxpayers
lack standing. The decision was not appealed.
Interstate Motor Trucks
•
•
Filed by businesses who claim that they directly
compete with businesses who receive benefits under
JOBZ.
October 10, 2008 – District Court said taxpayers lack
standing.
Income Received by Former Residents
• Law change – Minnesota will tax income that was earned
while a resident but was received while a nonresident.
• Revenue Notice 8-10 and Withholding Tax Fact Sheet 19
 Severance pay
 Equity based awards
 Other non-statutory deferred compensation
• Administrative issues and penalty relief
Sales Tax – Transfers to a SMLLC
• Law exempts transactions that qualify under §351 or
721
• Rule Hearing held June 30, 2008 – ALJ decision
issued September 3
• Held: Transfers to SMLLC not covered under the law and
are taxable
• Lack of consideration – is receipt of a membership
interest in a SMLLC consideration?
Illinois Developments
Mr. Jason Wyman
Partner
Deloitte Tax LLP
Chicago, Illinois
What Type of Receipt is it?
Type of receipt
Sourced to
Throw out rule
Tangible personal
property
Delivery point
None
Intangible — dealer
Customer location
None
Intangible — nondealer Income producing
activity
No income- producing
activity
Intellectual property
Where utilized
< 50% of gross receipts
Service
Where received
TP not taxable in state
of receipt
Rendition of Services
• Prior law:
– Each income-producing activity was sourced to Illinois if a
greater proportion of the cost of performance took place in
Illinois than outside Illinois (e.g., >50%)
– Cost of performance only included direct costs, under GAAP
– Favors out of state service providers
Rendition of Services
• For years ending on or after December 31, 2008, IITA
304(a)(3)(c-5)(iv) provides ordering rules for
determining sourcing of services
– Sales of services are in Illinois if the services are received
in Illinois
– Deemed receipt at the Ordering Office
– Deemed receipt at the Billing Address
Rendition of Services
• The fixed place of business rule
– Gross receipts from the performance of services provided to
a corporation, partnership, or trust may only be attributed to
a state where that corporation, partnership, or trust has a
fixed place of business
– The term “fixed place of business” has the same meaning
as that term is given in IRC Section 864 and the related
Treasury regulations. IITA 1501(a)(9.5)
Rendition of Services
• The ordering office rule
– The services shall be deemed to be received at the location
of the office of the customer from which the services were
ordered if
• The state where the services are received is not readily
determinable, or
• The customer which is a corporation, partnership, or trust does not
have a fixed place of business in the state where the services are
received
Rendition of Services
• The billing address rule
– If the ordering office cannot be determined, the services
shall be deemed to be received at the office of the customer
to which the services are billed
Rendition of Services
• Throw out rule
– If the taxpayer is not taxable in the state in which the
services are received, the sale is excluded from both the
numerator and the denominator of the sales factor
– Taxability in another state as defined in Existing Regulation
100.3200, which is the same regulation as used for
throwback
Interest and Sales of
Intangible Property
• IITA 304(a)(3)(C-5)(iii)(a)
– Dealers in Intangibles within the meaning of IRC Section
475(c)(1)
• IRC Section 475(c)(1) states that a “dealer in securities” is a
taxpayer who
– Regularly purchases securities from or sells securities to customers in the
ordinary course of a trade or business; or
– Regularly offers to enter into, assume, offset, assign, or otherwise terminate
positions in securities with customers in the ordinary course of a trade or
business
– GIL - IT 08-0028 – expands beyond stated IRC securities
Interest and Sales of
Intangible Property
• For Dealers in Intangibles
– The income from the sale of intangible property is sourced
to Illinois if it is received from a customer in Illinois
– Residence or domicile is deemed to be the billing address,
unless the taxpayer has actual knowledge of the residence
or domicile
– Applies to Interest, net gains (but not less than zero) and
other items of income from intangible personal property
Interest and Sales of
Intangible Property
• IITA 304(a)(3)(C-5)(iii)(b)
• In the case of all other taxpayers
– If the greater portion of the income-producing activity takes
place in Illinois, based on the cost of performance
– Applies to Interest, net gains (but not less than zero) and
other items of income from intangible personal property
– However, under the Existing Regulation 100.3370(c)(3)(A)
the mere holding of an intangible is not an incomeproducing activity
Interest and Sales of
Intangible Property
• Existing Regulation 100.3380(c)(2)
– Incidental or occasional sales of assets used in the regular
course of the taxpayer’s trade or business are excluded
from the sales factor.
– According to the IDOR this applies to sales of intangible
property
Publishing Services
• Under Sale of Services — statute directs IDOR to
adopt rules for Publishing Services – IITA 304(a)(3)(C5)(iv)
• Draft Regulation Section 100.3373
• Publishing Services — publishing, selling, licensing or
distributing newspapers, magazines, periodicals, trade
journals or other printed material.
• Does not include licensing of Intellectual Property
covered under IITA 304(a)(3)(B-1)
Publishing Services
• Printed Material — physical embodiment or printed
version of any thought or expression, including a play,
story, article, column or other literary, commercial,
educational, artistic or other written or printed work
• May be contained on any property or medium
including electronic medium
• Excludes Broadcasting covered by
Section 100.3372
• Excludes licensing of Intellectual Property covered
under IITA 304(a)(3)(B-1)
Publishing Services
• Publishing sales include
– Gross receipts from sale of printed material in form of tangible
personal property as provided in Sections 100.3370(c)
[destination and throwback rules] and 100.3380(c) [special rules]
– Other Gross receipts from advertising and sale, rental, or other
use of customer lists using the taxpayer’s Circulation Factor
• Circulation Factor — for each individual publication the in-state
circulation over total circulation
– Rating statistics reflected in sources, such as Audit Bureau of
Circulations
– Source must be consistently used year to year
Publishing Services
• Fixed Place of Business Rule — receipts from Corporation,
Partnership or Trust cannot be sourced to a state where Customer
does not have a fixed place of business
• Services Sourced To Ordering Office when
– Customer does not have a Fixed Place of Business in the state
where services are received or
– If the state where received is Not Readily Determinable
• Services Sourced to Billing Address if Ordering Office cannot be
determined
• Throw Out Rule — if Taxpayer is not taxable in state where service
is received
Intellectual Property
• For tax years ending on or after 12/31/1999
• Throw Out Rule — IITA 304(a)(3)(B-2)
– “Gross receipts from the license, sale, or other disposition of patents,
copyrights, trademarks and similar items of intangible personal
property”
– ARE EXCLUDED from Numerator and Denominator
• Exception
– Such Receipts are 50% or more of Unitary Business Group’s Total
Receipts
– For current and 2 preceding tax years
• Test is for the entire Unitary Business Group
Intellectual Property
• Draft Regulation 100.3370(a)(2)(F)
– Gross Receipts includes damages and settlements from claims for
infringements
– Gross Receipts from licensing, sale, or other disposition of patents
include ONLY amounts received from person using the patent in
production, fabrication, or manufacturing
– Gross Receipts from licensing, sale, or other disposition of copyright
include ONLY amounts received from person engaged in printing or
other publication of material protected by copyright
– Does not include — Publishing or Broadcasting within Sections
100.3372 or 100.3373
Intellectual Property
• Draft Regulation 100.3370(a)(2)(F) — limits the scope
of throw out rule
• Note that draft regulation would take license of
computer software or music for personal use out of this
rule
• Existing Regulation 100.3380(c)(5) — net gains from
sale of business intangibles, including patents and
copyrights, are included in the factor
Intellectual Property
• For tax years ending on or after 12/31/1999
• IITA 304(a)(3)(B-1)
– Only applies if more than 50% receipts for current year and
previous 2 years are from IP
• Treated as IL sales
– Patents if employed in production in IL
– Copyrights if printing or publication originates in IL
– Trademarks and other IP if commercial domicile of purchaser is in IL
Intellectual Property
• If production or publication occurs in more than
one state, then amount in IL is receipt from
transaction multiplied by
– Licensee’s receipts from product produced in IL
– divided by licensee’s receipts from all product produced
• Throw Out Rule - If place of utilization cannot be
determined from taxpayer’s books and records
NEWS
BREAK
What’s
Happening
Tuesday
December 16, 2008
FEATURING SPECIAL GUESTS:
Mr. James Wetzler
Director, Multi-State Tax Group
Deloitte Tax LLP
New York, New York
Mr. Richard Genetelli
President
The Genetelli Consulting Group
New York, New York
Mr. David Shipley
Partner
McCarter & English, LLP
Philadelphia, Pennsylvania
Combined Reporting
Developments and Controversies
• Budget deficits
– Significant audit activity
• Forced combination
• De-combination
• Planning strategies
– Assess implications
NY
NY VDA Program
• VDA program
– NY has historically negotiated VDA’s and Pre-Audit
Payment Agreements.
– New law creates legal basis for program and right to
participate.
• Receipt of notice no bar to participating
• However, ongoing criminal investigation or audit is a bar
• Not available for reportable or listed transactions
– Eliminates need for anonymity
New York
Combined Reporting General Requirements*
•
•
•
•
Ownership
Unitary business
Distortion
Critical issues
– Documentation
– New combination rules in New York State
*Effective for tax years beginning before 1/1/2007
NY
Sourcing of Receipts from
Electronic Activities
• NY law contains a residual category of “other business receipts”
sourced to where the income is earned. Tax Law §210.3(a)(2)(D)
• Advisory opinions provided for customer based sourcing of
income from electronic sale of various intangibles. See
TSB-A-02(3)C (dealing with Internet sales of gift certificates), TSB-A99(16)C (dealing with information services accessed electronically), and
TSB-A-00(15)C (also dealing with information services)
• On audit, the Department has been treating a variety of
electronic activities as “other business receipts” and
asserting customer-based sourcing.
• Litigation expected
New York
Combined Reporting Reporting Rules*
• Ownership
• Unitary business
• Substantial intercorporate transactions
– Intercorporate receipts
– Intercorporate expenditures
– Intercorporate asset transfers
• TSB-M-08(2)C (March 3, 2008)
– 10-step process to determine companies to be included in a combined
group
• Potential Litigation
– Economic substance
*Effective for tax years beginning before 1/1/2007
NY
Significant Controversies
• Unitary business
• Distortion
– How much is needed
• Sale of a subsidiary
– Bausch and Lomb decision
• TSB-M08(3)C (March 10, 2008)
NY
Pennsylvania Taxation of
Computer Software
• Graham Packaging – Commonwealth Court - sale of
electronically transmitted software is taxable.
• Department’s Reaction – Changed position and
began taxing electronic delivery but limited case to
software and not other digital goods.
• Dechert – Commonwealth Court followed Graham
Packaging; Argued before PA Supreme Court.
PA
Pennsylvania Treatment of
Intangible Holding Companies
• Intangible Addback Statute – Not the preferred
method but may be considered as a revenue raiser.
• Geoffrey Regulation? – Department is “reading
cases” and “examining options.”
• Current position is not to assert intangible nexus.
PA
Throwout Rule - Litigation
• The New Jersey Tax Court held that the throwout
rule is facially constitutional finding that it could
operate constitutionally in some instances such as
where 1) Receipts excluded from sales-factor;
denominator are generated from New Jersey; 2) It
has no material effect on sales factor; and 3) The
property and payroll factors temper the effect of the
throwout rule on the sale factor.
NJ
Throwout – Legislative Changes
• Assembly Bill 2722 / Senate Bill 1874 – Repeals
the throwout rule.
• Passed Assembly on October 27, 2008.
• Amended version unanimously passed Senate on
November 24, 2008 and Assembly on December
15, 2008.
• Fiscal Note projects cost to be $89 million.
NJ
New Jersey Cases
• Praxair – Intangible nexus only applicable from
1996 forward; Remanded on penalty issue.
• New Jersey Natural Gas – No regular place of
business, no right to apportion, but taxpayer
permitted taxes paid credit.
• Clorox – Transfer to subsidiary in IRC § 351
transaction does not require “recoupling” with
federal depreciation.
NJ
Changes at the Division of Taxation
• Retired – Richard Schrader (Asst. Dir. of Audit), Bill
Bryan (Chief, Conferences and Appeals), Nick
Catalano (Chief, Regulatory Services) and John
Metzger (Regulatory Services).
• Promoted – Denise Lambert-Harding (Deputy
Director), Michele Bartolomei (Asst. Director of
Audit), Paul Provost (Chief, Conferences &
Appeals).
NJ
What’s
Happening
Tuesday
December 16, 2008
Holiday Greetings!
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