Transcript 2012 1113 Market Based Apportionment

Market-Based
Apportionment
Nick Niemann
McGrath North Mullin & Kratz, PC LLO
Omaha, NE
Apportionment Nationally
Sale of TPP
Initially
• 3 factors
– Property
– Payroll
– Sales
Trend
• Single factor
• Some combination of
1-3 factors
– Single, double or triple
weighting
Sale of Services
Initially
• Cost of Performance
– Cliff (All-or-Nothing)
Trend
• Cost of Performance
– Percentage
• Market-State
DRAMATIC EFFECT OF NEBRASKA’S PRESENT INCOME APPORTIONMENT RULE
Company Facts:
·
·
·
Service Provider Operating In Nebraska and Iowa
Company Costs of Performance (Facilities and Employees): 51% Nebraska; 49% Iowa
Customer Locations: 51% Nebraska; 49% Iowa
Example #1
Question:
How Should The Company Income Be Divided
(Apportioned) Between Nebraska And Iowa?
Without LB 872
(Cost of Performance Rule)
Result:
Taxed On 100% of Income
+
Result:
Taxed On 49% of Income
=
Total
Taxed on
149% of
Income
=
Total
Taxed on
100% of
Income
Market-State Rule
Cost of Performance Rule
With LB 872
(Market-State Rule)
Result:
Taxed On 51% of Income
Market-State Rule
+
Result:
Taxed On 49% of Income
Market-State Rule
DRAMATIC EFFECT OF NEBRASKA’S PRESENT INCOME APPORTIONMENT RULE
Company Facts:
·
·
·
Service Provider Operating In Nebraska and Iowa
Company Costs of Performance (Facilities and Employees): 49% Nebraska; 51% Iowa
Customer Locations: 49% Nebraska; 51% Iowa
Example #2
Question:
How Should The Company Income Be Divided
(Apportioned) Between Nebraska And Iowa?
Without LB 872
(Cost of Performance Rule)
Result:
Taxed On 0% of Income
+
Result:
Taxed On 51% of Income
=
Total
Taxed on
51% of
Income
=
Total
Taxed on
100% of
Income
Market-State Rule
Cost of Performance Rule
With LB 872
(Market-State Rule)
Result:
Taxed On 49% of Income
Market-State Rule
+
Result:
Taxed On 51% of Income
Market-State Rule
Sales Factor: Sourcing of Services
2007
2009
Effective
2014
2009
2007
2003
2009


2011
Phase-In
2014-2017
2010
2011
2005
COP – Cliff (All-or-Nothing)
COP - Percentage
Market-sourcing approach
Note: Year shown = States enacting market-state in past 10 years.
No Income Tax
Other
Nebraska’s
Apportionment
Rule History
TPP
• 1967: 3 factor
• 1987: Single factor (Sales)
– LB 772: Phase In (19881992)
– LB 775: Immediate for
Nebraska incentive package
Services
• 1967: COP – Cliff
• 2012 Single factor (Sales)
- LB 872: Market-State
(Eff. 1-1-14)
State From Which Order Was Placed
(If that office cannot be determined,
then Customer’s Billing Address)
Nebraska Market-State Rules
1. Apportionment of Services
Apportioned To NE If
Derived From Buyer In NE
Business Customers:
1) Buyer Engaged In Business In
NE; and
2) Relates To That Part Of The
Business Operated In NE
Individual Customers:
Individual Physically
Present In NE
Services On
Tangible Personal Property:
TPP in NE at the time the service
is rendered;
Services On
Real Property:
Property in NE
Use In Multiple States:
Use In NE
% Use In Everywhere
2. Application Service (SaaS)
In NE If Buyer Uses SaaS In NE
Business Customers:
Uses In Regular Course Of
Business In NE
Individual Customers:
Billing Address In NE
Use In Multiple States:
% Use In NE
% Use In Everywhere
If Location Cannot Be Determined:
State From Which Order Was Placed
(If Indeterminable, Customer’s Billing Address)
Nebraska Market-State Rules
• Sale of Intangibles: . . . . . . . Location of Use
• Treasury Function: . . . . . . Extent of Management
Loan: . . . . . . . . . . . . . . . . . . Location of Security or Debtor’s
Address
• Credit Card: . . . . . . . . . . . . . Billing Address
• Lease or License of TPP: . . . Property Location
• Sale, Lease or License of
Real Property: . . . . . . . . . . . Property Location
• Other Sales: . . . . . . . . . . . . Extent of NE Business Activity
• Telecom Companies: . . . . . Keep COP - Cliff
Market-State for Services
- Tax Perspective Pros
• In-state service providers
– Avoid >100% taxation
– No tax penalty for engaging in
a service
• Less TPP v. Service
controversies
• Less “Income-producing
activity” controversies
• No more COP interpretation
issues
Cons
• Increases taxable jurisdictions
for out-of-state service
providers
• More nexus enforcement
• Multiple Market Based
Sourcing tests
• Retaining / obtaining user or
customer information
– Benefits received
• Cost of compliance
• Introduces new sourcing
interpretation issues
Market-State for Services
- Economic Development Perspective Pros
• No tax penalty for having
jobs and capital investment
in the taxing State
• Puts emphasis on exporting
services (and importing
revenue) using in-State
employees and capital
investment
Cons
• Certain in-State companies
may prefer COP – Cliff if
results in -0- tax
• May cause some out-ofstate service providers to
not make services available
to in-State customers
Market-Based Apportionment
Nick Niemann
Thank You
Nick Niemann
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Partner
Member
- McGrath North Law Firm
- American & Nebraska Bar Association
- American Institute & Nebraska Society of CPA’s
- Council On State Taxation (Practitioner)
Creighton
- College of Business 1978 (Summa Cum Laude)
- School of Law 1981 (Magna Cum Laude)
- Adjunct Faculty – State Tax
Best Lawyers In America (Tax Law and Litigation & Controversy – Tax)
Principal designer and drafter of most of Nebraska’s economic development tax incentive
programs (e.g., 1987’s LB775 Employment and Investment Growth Act and 2005’s LB312
Nebraska Advantage Programs, the Nebraska capital gains exclusion and the single factor
corporate apportionment formula).
Nick works with company tax department personnel and their outside CPA firms and/or
legal counsel, to address site selection, state tax planning opportunities, tax audits and
appeals, refund claims and appeals, and tax and other incentives.
Contact Info: [email protected]
(402) 633-1489
Website: www.McGrathNorth.com
Nick’s partner, Matt Ottemann, of
McGrath North assisted in the
creation of this presentation.
Market-Based Apportionment
Presentation Disclaimer
Disclaimer
•This presentation should not be considered as legal, tax, business or financial advice. This
presentation is designed to provide information about the subject matter covered. It is provided with
the understanding that while the speaker/author is a practicing state tax and incentive advisor, neither
he nor his firm has been engaged by the attendee/reader to render legal or other professional services
(unless a specific engagement agreement has been executed). If legal advice or other expert assistance
is required by the attendee/reader, the services of a competent professional should be sought.
Circular 230 Disclosure
•The following statement is required by the U.S. Treasury Department Regulations: Any U.S. tax advice
contained in this communication is not intended or written to be used, and cannot be used, for the
purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing, or
recommending to another party any transaction or matter addressed here.