Transcript Detroit TEI – December 9, 2014

State Legislative Update
Detroit TEI – December 9, 2014
Matthew Boch
[email protected]
(312) 984-5399
Lindsay M. LaCava
[email protected]
(212) 547-5344
www.mwe.com
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Agenda
 Tax Reform:
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New York Corporate Tax Reform.
Rhode Island Corporate Tax Reform.
North Carolina Tax Reform.
D.C. Tax Reform.
Virginia Addback Legislation.
MTC Apportionment Update.
State Click-Through Nexus Update.
Federal Legislation.
Unclaimed Property Update.
www.mwe.com
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New York Corporate Tax Reform
 Main Components of New York Corporate Tax Reform.
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Economic Nexus.
Modified Tax Base.
Classification of Income.
Apportionment.
Combined Reporting.
Net Operating Losses.
*Most changes effective Jan. 1, 2015
www.mwe.com
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New York Corporate Tax Reform –
Nexus

New Economic Nexus Standard.
− $1M or more of receipts included in numerator of
apportionment factor.
− New rules for combined reporting groups.
• Aggregates receipts for every company in a combined group
with at least $10,000 of New York receipts.
• Nexus established if aggregate New York receipts of at least
$1M.
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Fulfillment Services Exception Repealed.
Corporate Partner Rules.
www.mwe.com
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New York Corporate Tax Reform –
Modified Tax Base
 Article 32 tax repealed. Banking and financial
institutions are subject to tax under Article 9-A.
 Tax computed on three bases:
− Business income.
− Capital.
− Fixed dollar minimum.
 Separate tax on subsidiary capital eliminated.
www.mwe.com
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New York Corporate Tax Reform –
Modified Tax Base
 New Rates, Caps, and Brackets.
− Tax rate on ENI base reduced from 7.1% to 6.5% for tax years
on or after January 1, 2016.
• Lower rates for certain taxpayers (e.g., qualified New York
manufacturers).
− Capital base tax rate of 0.15% phased down to 0% for tax
years beginning on or after January 1, 2021.
− Cap under capital base tax increased from $1M to $5M.
− Additional brackets under fixed dollar minimum tax.
• Current top bracket (receipts > $25M) = $4,500 of tax.
• New to bracket (receipts > $1B) = $200,000 of tax.
www.mwe.com
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New York Corporate Tax Reform –
Classification of Income and Expenses
 Income Categories.
− Three categories of income: (i) Business Income
(ii) Investment Income and (iii) Other Exempt Income.
• Only business income is subject to tax.
− Business income = Entire Net Income minus
(i) Net Investment Income and (ii) Net Other Exempt Income.
− Repeals the exclusion for 100% of income, gains and losses
from subsidiary capital.
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New York Corporate Tax Reform –
Classification of Income and Expenses
 Changes to Expense Attribution.
− Under the new law, investment income and “other exempt income” must
be reduced by interest expenses directly or indirectly attributable to those
items of income.
− Attribution is no longer required for non-interest expenses.
− If the interest expense attribution amount exceeds investment income
and other exempt income, the excess interest expense must be added
back to ENI.
− New 40% election.
www.mwe.com
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New York Corporate Tax Reform –
Apportionment
 The new law retains the receipts-only apportionment
scheme under Article 9-A.
 The new law generally applies a market-based sourcing
regime to all receipts “that are included in the
computation of the taxpayer’s business income for the
taxable year.”
 The new law expands the categories of receipts for
which sourcing is specifically addressed and provides
guidance on how to apply the sourcing rules.
www.mwe.com
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New York Corporate Tax Reform –
Combined Reporting
 Combined report required if corporations:
− Are engaged in a unitary business; and
− More-than-50% common ownership test is met (measured by
voting power of capital stock).
 Presence or lack of substantial intercorporate
transactions or distortion is irrelevant.
 Affiliated Group Election.
− Corporations that meet the more-than-50% common
ownership test may elect to be treated as a combined group,
regardless of whether those corporations are conducting a
unitary business.
www.mwe.com
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New York Corporate Tax Reform –
Net Operating Losses
 The new law makes significant changes to the
treatment of net operating losses.
 Corporations are permitted two types of NOLs:
1. A net operating loss deduction (for post-2014 NOLs), and
2. A “prior NOL conversion subtraction” (for pre-2015 NOLs)
www.mwe.com
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New York Corporate Tax Reform –
Net Operating Losses
 Under the new law, the NOL is the amount of a corporation’s
business loss for the tax year multiplied by its apportionment
factor for that year
 Does not include NOLs from tax years beginning before January
1, 2015 (replaced with the “prior NOL conversion subtraction”)
 Removes the existing limitation on NOL deductions based on the
“amount allowed for federal income tax purposes”
 Eliminates the requirement that the NOL deduction originate in
the same source year as the federal NOL deduction for that year
 Conforms the NOL carryforward period to the 20-year federal
carryforward period, and permits a three-year carryback (but not
to tax years beginning before January 1, 2015)
www.mwe.com
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Rhode Island Corporate Tax Reform
 Changes effective for tax years beginning on or after Jan. 1, 2015.
− Mandatory combined reporting for unitary businesses.
• 50% common ownership.
− Elective combined reporting for affiliated groups.
− Use of NOLs and credits limited to the corporation that generated
them.
− Repeal of related party expense addback.
− Single sales factor.
• Market Sourcing.
• Finnigan.
− Rate reduction.
www.mwe.com
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North Carolina and D.C. Tax Reform
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North Carolina:
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Legislation was passed building on the more comprehensive tax
reform passed in 2013 that lowered the income taxes, broadened
the sales tax base, and eliminated the state estate tax.
The new legislation eliminates municipal authority to levy
privilege license taxes on local businesses, effective July 1, 2015.
District of Columbia:
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www.mwe.com
2015 Budget Bill reduces income tax rates, broadens the sales
tax base (e.g. “Yoga Tax”), and adopts a single sales factor
apportionment formula, effective Jan. 1, 2015.
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Virginia Addback Legislation
 Retroactive: Applicable for tax years beginning on and after
January 1, 2004.
 Subject to tax exception applies on a post-apportionment basis
and only if recipient has nexus with the taxing state.
− Under current law, Virginia provides an addback exception to the
extent the income received by the related member is “subject to a tax
based on or measured by net income or capital imposed by Virginia,
another state, or a foreign government that has entered into a
comprehensive tax treaty with the United States government.”
− S.B. 5001 provides that the subject to tax exception is limited and
applies only to the portion of such income “received by the related
member, which portion is attributed to a state or foreign government in
which the related member has sufficient nexus to be subject to such
taxes.”
www.mwe.com
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Virginia Addback Legislation
 Unrelated party addback exception applies only if
royalty recipient directly enters into agreement with
unrelated party.
− Under current law, Virginia generally permits an addback
exception to the extent the related member derives at least
one-third of its gross revenues from the licensing of intangible
property to parties that are not related members.
− S.B. 5001 provides that the unrelated party addback exception
is limited and applies only to the portion of such income
derived from “licensing agreements for which the rates and
terms are comparable to the rates and terms of agreements
that the related member has actually entered into with
unrelated entities.”
www.mwe.com
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MTC Recommendations for UDITPA
 Broadening the definition of business income.
 Narrowing the definition of “sales.”
 Recommending a double-weighted sales factor.
 Changing the sales factor for services and intangibles from
cost of performance to market sourcing.
 Authorizing a state to promulgate industry-wide regulations
under alternative apportionment.
www.mwe.com
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Click-Through Nexus Update
 Click-Through Nexus Laws
Washington
Montana
Oregon
Oregon
North Dakota
Maine
Minnesota
VT
Vt.
NH
New York Mass.
CT
CT
PA
R.I.
Pennsylvania
Wisconsin
Idaho
Wyoming
Nebraska
Nevada
Utah
California
Arizona
Colorado
New Mexico
Michigan
Michigan
South Dakota
Iowa
Illinois* Indiana
Kansas
Oklahoma
Kentucky
Missouri
N.
MD J.
Ohio
W. Va.
W. VAVirginia
Alaska
Hawaii
M.D.
D.C.
N. Carolina
TN
S. Carolina
Arkansas
Miss.
Miss. Alabama Georgia
Alabama
Texas
Del.
Louisiana
Florida
Legend
Nexus legislation passed
Nexus without statute
Legislation under
consideration
Legislation considered but
not passed or passed then
vetoed
*Illinois recently enacted new click-through nexus
legislation after the Illinois Supreme Court struck down
the state’s original click-through nexus law.
www.mwe.com
Other (incl. notification
requirement)
No state sales or use tax
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Click-Through Nexus Update
State
Effective Date
Affiliate Threshold
Statute
Arkansas (rebuttable presumption)
Oct. 24, 2011
More than $10,000
Ark. Code Ann. § 26-52-117
California (rebuttable presumption)
Sept. 15, 2012.
More than $10,000 and (and more than $1,000,000 in
annual in-state sales whether a result of click-through
referrals or otherwise)
Cal. Rev. & Tax. § 6203(c)(5)
Connecticut (irrebuttable presumption)
July 1, 2011
More than $2,000
Conn. Gen. Stat. § 12-407(a)(12)(L)
Georgia (rebuttable presumption)
Oct. 1, 2012
More than $50,000
Ga. Stat. Ann. § 48-8-2(8)(M)
Illinois (rebuttable presumption)
Jan.1, 2015
More than $10,000
35 ILCS §§ 105/2 and 110/2
Kansas (rebuttable presumption)
Jul. 1, 2013
More than $10,000
Kan. Stat § 79-3702(h)(2)(C)
Maine (rebuttable presumption)
Oct. 9, 2013
More than $10,000
Me. Rev. Stat. Ann. § 1754-B(1-A)(C)
Minnesota (rebuttable presumption)
July 1, 2013
More than $10,000
Minn. Stat. § 297A.66, Subd. 4a
Missouri (rebuttable presumption)
Aug. 28, 2013
More than $10,000
Mo. Rev. Stat. § 144.605(2)(e)
New Jersey (rebuttable presumption)
July 1, 2014
More than $10,000
N.J. Rev. Stat. § 54:32B-2(i)(1)(C)
New York (rebuttable presumption)
June 1, 2008
More than $10,000
N.Y. Tax Law § 1101(b)(8)(vi)
North Carolina (rebuttable presumption)
Aug. 7, 2009
More than $10,000
N.C. Gen. Stat. § 105-164.8(b)(3)
Rhode Island (rebuttable presumption)
July 1, 2009
More than $5,000
R.I. Gen. Laws § 44-18-15(a)(2)
Vermont (rebuttable presumption)
When adopted in
15 other states.
More than $10,000
Vt. Stat. Ann. tit. 32, § 9701(9)(I)
(H.B. 436)
*The Pennsylvania DOR requires remote sellers to collect sales and use tax. Pa. Sales and Use Tax Bulletin 2011-01 (Dec. 1, 2011).
www.mwe.com
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Federal Legislation
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Marketplace Fairness Act of 2013 (S. 743, H.R. 684).
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Passed by Senate in May 2013, remains tied up in House.
As passed by the Senate, the Act authorizes states to enforce sales and use tax
requirements on remote sellers who make more than $1 million a year
nationwide, provided the state first simplifies sales tax administration and
provides free sales tax computation software to out of state retailers.
Gives states authority to collect sales and use tax on all in-state purchases—
including those involving remote sellers that have no physical presence there.
Digital Goods and Services Tax Fairness Act of 2013 (S. 1364).
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www.mwe.com
Introduced in Senate.
Prohibits states and localities from imposing multiple or discriminatory taxes on
the sale or use of a digital good or service delivered or transferred electronically
to a customer.
Taxation is limited to the jurisdiction of the customer’s tax address.
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Federal Legislation
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Internet Tax Freedom Act (ITFA).
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Bans state and local taxation of Internet access and multiple taxes
on electronic commerce.
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Originally passed in 1998.
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Temporarily extended through Dec. 11, 2014.
Talk of permanent extension (possibly combined with MFA?)
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www.mwe.com
Several state were grandfathered in.
Extended 4 times by Congress since 1998.
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Does not ban taxation of sales made over the Internet.
Permanent ITFA (H.R. 3086) passed by House on July 15. 2014.
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Federal Legislation
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Mobile Workforce State Income Tax Simplification Act of
2013 (S. 1645, H.R. 1129).
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Mobile (multistate) employee cannot be subject to income tax in any state
other than: (1) the state of the employee's residence; and (2) the state within
which the employee is present and performing employment duties for more
than 30 days during the calendar year.
This threshold is extended to employers withholding and information reporting
requirements.
Business Activity Tax Simplification Act of 2013 (H.R. 2992).
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Prohibits states from levying a tax unless a business had physical presence in
a state for longer than 14 days.
Would also restrict the apportionment of income from a unitary business to
only the portion of the business activity conducted by physically present
businesses in a state.
Hearing of Judiciary Committee held on Feb. 26, 2014.
www.mwe.com
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Unclaimed Property Developments
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The Uniform Law Commission started the process of rewriting to
Uniform Unclaimed Property Act (UUPA).
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Only done once every 15-20 years.
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76 issues are being considered, e.g.
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UUPA is widely accepted by states—will impact state law for decades.
(1) incorporation of derivative rights doctrine.
(2) establishing an administrative review process.
(3) establishing a statute of repose limiting the scope of audits.
(4) contract auditor’s compensation.
(5) proper sampling techniques and.
(6) establishing a business-to-business exemption.
State tax administrators are deeply involved in the rewrite.
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www.mwe.com
Met in April and again on Nov. 7-8 in DC.
Next meeting scheduled for Feb. 20-21, 2015 in DC.
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Matthew C. Boch
Matthew C. Boch is an associate in the law firm of McDermott Will & Emery LLP and is based in the Firm’s Chicago office.
He focuses his practice on state and local taxes and incentives. Matthew represents taxpayers at all stages of state and
local tax controversies, from audits to appellate litigation. He advises clients on planning, transactional and compliance
issues relating to state and local income and franchise taxes, sales and use taxes, tax incentives, premium taxes, gross
receipts taxes and other miscellaneous taxes. He also represents clients seeking and negotiating tax incentives.
Matthew speaks regularly on state and local tax issues and has authored several publications concerning nexus and
enforcement issues. He is an Assistant Editor of the Journal of Multistate Taxation and Incentives. He is a member of the
bar of the State of Illinois and has been admitted to practice before the U.S. Tax Court and the U.S. District Court for the
Northern District of Illinois. He is a member of the American Bar Association Tax Section’s State and Local Tax Committee
and the Chicago Bar Association State and Local Tax Committee.
Contact
Chicago
Tel: +1 312 984 5399
eFax: +1 312 277 1956
[email protected]
Education
Harvard Law School,
Doctor of Laws, 2007
www.mwe.com
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Lindsay M. LaCava
Lindsay M. LaCava is a partner in the law firm of McDermott Will & Emery LLP and is based in the Firm's
New York office. She focuses her practice on state and local tax. Lindsay assists businesses and
individuals with state and local tax planning and litigation matters. In the controversy area, she represents
clients at all stages of state and local tax disputes including the audit, administrative appeal, state trial
court, and state appellate and supreme court stages. In the transactional planning and consulting area,
Lindsay advises clients with respect to the state and local business activity tax, sales and use tax, and
personal income tax consequences of various transactions and activities.
Contact
New York
Tel: +1 212 547 5344
eFax: +1 646 390 3387
[email protected]
Education
University of
Connecticut , B.S.
Quinnipiac University
School of Law , J.D.
In addition to speaking on a variety of state tax topics, Lindsay recently co-authored a chapter on the state
tax appeals process for the “State Business Taxes” treatise published by ALM Media. She is a member of
the Connecticut Bar Association Tax Section’s Executive Committee and the American Bar Association
Tax Section’s State and Local Tax Committee.
Lindsay has advised individual and corporate clients regarding state and local, federal, and international
tax consequences of various business transactions, and has represented taxpayers in all aspects of
federal and state tax controversy matters. In addition, she previously worked at a “Big Four” accounting
firm, where her practice focused exclusively on state and local tax.
Lindsay is admitted to practice in Connecticut, New York and the United States Tax Court. She is also a
certified public accountant.
New York University,
School of Law, LL.M.
www.mwe.com
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