Latest Developments in Sales Factor Trends Including Market Based Sourcing COST: Mid-West Regional...

Latest Developments in Sales Factor Trends Including Market Based Sourcing

www.pwc.com

COST: Mid-West RegionalState Tax SeminarNovember 12, 2015

Maureen Pechacek, PartnerDavid Buschko, Director

COST Mid-West Regional State Tax SeminarPwC 2

Learning Objectives

• To understand the reasons why states are moving towards enhanced sales factor weighting. As well as to identify opportunities that exist in states that allow for enhanced sales factor elections.

• To understand the different methods for sourcing receipts under the various “market” approaches and identify some opportunities and risks they can create.

• To understand situations that can create opportunities for taxpayers to seek alternative apportionment relief.

11/12/2015


Agenda

•Enhanced Sales Factor Weighting

•Market Based Sourcing

•Alternative Apportionment

•MTC Elections

11/12/2015

PwC

Enhanced Sales Factor Weighting

411/12/2015COST Mid-West Regional State Tax Seminar


Apportionment Formula• Three Factors

− Property− Payroll− Sales

Traditional Formula Property within Payroll within Receipts withinState_______ + State______ + State_______ ÷ 3Property Payroll Receiptseverywhere everywhere everywhere

11/12/2015

General Apportionment Formula

Enhanced Sales Factor Weighting


Enhanced Sales Factor Weighting - Apportionment Formulas* - 1998

11/12/2015

Equally weighted three factor formula

Double weighted sales factor

Triple or greater weighted or single sales factor*Does not address industry-specific or optional formulas

AK

HI

ME

VTNH MA

NYCT

PA

MD

DE

VAWV

NC

SC

GA

FL

ILOH

IN

MIWI

KY

TN

ALMS

AR

LATX

OK

MOKS

IA

MN ND

SD

NE

NMAZ

COUT

WY

MT

WA

OR

ID

NV

CA

DC

NJ

RI



11/12/2015




AK

HI

ME

VTNH MA

NYCT

PA

MD

DE

VAWV

NC

SC

GA

FL

ILOH

IN

MIWI

KY

TN

ALMS

AR

LATX

OK

MOKS

IA

MN ND

SD

NE

NMAZ

COUT

WY

MT

WA

OR

ID

NV

CA

DC

NJ

RI



11/12/2015




Reflects changes enacted in 2014 that might take effect later

AK

HI

ME

VTNH MA

NYCT

PA

MD

DE

VAWV

NC

SC

GA

FL

ILOH

IN

MIWI

KY

TN

ALMS

AR

LATX

OK

MOKS

IA

MN ND

SD

NE

NMAZ

COUT

WY

MT

WA

OR

ID

NV

CA

DC

NJ

RI

COST Mid-West Regional State Tax SeminarPwC

Enhanced Sales Factor Weighting– District of Columbia

• FY2015 Budget Support Emergency Act of 2014, effective for tax years beginning after December 31, 2014

• Adopts single weighted sales factor formula and market-based sourcing for sales of other than tangible personal property

911/12/2015


Enhanced Sales Factor Weighting– Missouri Legislation

H.B. 128, signed on August 28, 2013

• The Missouri Department of Revenue has adopted a new regulation addressing the new apportionment election provided under H.B. 128.

• The regulation provides that the new single sales factor may be elected on an original income tax return filed on or after August 28, 2013, regardless of the taxable year for which the original income tax return is being filed.

• The applicability of the election clarifies an ambiguity that existed in the statute - 12 CSR 10-2.052, Optional Single Sales Factor, Missouri Register (2/3/14), effective 30 days after published in the Missouri Code of State Regulations.

S.B. 19, signed on May 6, 2015

• Receipts from sales of services and intangibles are subject to market-based sourcing under the new single sales factor apportionment provisions enacted in July 2013.

• Provides that all taxpayers are eligible for the new single sales factor election. Left unresolved, however, is when the election becomes available to sellers of other than tangible personal property. 10

11/12/2015


Enhanced Sales Factor Weighting– New Mexico

• Under current law, manufacturers may elect to apportion business income to New Mexico using a double-weighted sales factor.

• H.B. 641 provides an election, binding for three years, to phase in single sales factor apportionment for tax years beginning on or after:

• 1/1/14 and before 1/1/15, a double-weighted sales factor;

• 1/1/15 and before 1/1/16, a triple-weighted sales factor;

• 1/1/16 and before 1/1/17, sales factor multiplied by seven;

• 1/1/17 and before 1/1/18 sales factor multiplied by eight;

• 1/1/18 and there after, single sales factor.

• H.B. 641 removes the sales factor throwback rule for manufacturers making the election to apportion income using the phased-in single sales factor formula.

1111/12/2015


Enhanced Sales Factor Weighting– North Carolina Legislation

H.B. 97 (L. 2015-241), signed September 18, 2015

• The 2015 Appropriations are effective for tax years beginning on or after January 1, 2016, include the following:

• corporate income tax rate reduced from 5.0% to 4.0%

• deduction limitation for related party interest expenses

• phase-in a single sales factor in the 2016 and 2017 tax years

• market-based sourcing information reporting required

• Enactment of the corporate income/franchise tax provisions were contingent on both H.B. 117 and H.B. 943 being ratified. The bills were ratified on 9/24/2015 and 9/30/2015 respectively.

1211/12/2015


Enhanced Sales Factor Weighting– North Dakota

S.B. 2292, signed on April 20, 2015

• Effective for taxable years beginning after December 31, 2014, taxpayers are allowed to make an election to apportion business income with a sales factor that phases into a single-sales factor over a five year period.

• Additionally, certain provisions of the Multistate Tax Compact. For example, Article III of the Compact, which allows taxpayers an election to apportion under the laws of the state or in accordance with Compact provisions, was repealed.

1311/12/2015


Enhanced Sales Factor Weighting– Rhode Island

H.B. 7133, signed on June 19, 2014

• Move from equal weighted formula to single sales factor

• Service receipts are sourced to a state “to the extent the recipient receives benefit of the service” in the state

• Effective for tax years beginning on or after January 1, 2015

1411/12/2015


Enhanced Sales Factor Weighting– Polling Question

How significant has the increase in sales factor weighting been on your company’s Effective Tax Rate (ETR)?

a) Increase

b) Decrease

c) Immaterial

d) Do not know

1511/12/2015

PwC

Market Based Sourcing



• Difficulty in determining/sourcing the cost of production for services or intangibles

• Attempt to match receipts to the source of the corresponding revenue stream

• Move away from the “all or nothing” mentality of traditional cost of performance

• The move towards an enhanced technology and service based economy, has put more pressure on traditional cost of performance sourcing

• As states have increased weight of sales factor, market based sourcing of services makes theoretical and economic sense

11/12/2015

Many states are moving toward market-based sourcing, particularly for sales of services and intangibles. The reasons include:




• Receipts from other than sales of inventory

• Cost of Performance (Preponderance v. Proportional )

• Preponderance – the entire sale is attributed to the single state in which the greater proportion of the costs of performance is incurred. Generally an “all-or-nothing” result

• Proportional – a portion of the sale is attributed to the state based on the proportion of the associated costs in the state. In other words, a percentage of receipts is sourced to the state in proportion to the time spent or costs incurred in such state

• Personal service rule (Generally Time Spent)

• A market-sourcing method

• Generally, sourced to the location of where the customer receives the benefit or where the services are provided

• “Recent” change from cost-of-performance to market-based sourcing

• Alabama, California, Colorado, Illinois, Michigan, New York, New York City, Pennsylvania, Rhode Island, Tennessee, Utah, Wisconsin 11/12/2015

Which state gets the receipts in its numerator?


Cost of Performance - Questions to Consider

• What is a particular “item of income” for this purpose?• Ex: Fees, Commissions, services, interest, etc.

• What costs are taken into account?• Costs of performance – direct costs, amounts paid to an agent or independent

contractor (e.g. Indirect Costs) as well as costs associated with the use of tangible and intangible personal property

• What is “income-producing activity?”• Ex: activities performed by the taxpayer’s employees, independent

contractors for the taxpayer

• Transactional versus operational approach?• At what level must the cost of performance analysis be performed?• Watch states with cost of performance sourcing statutes, but adopting market

in regulations or rulings.

• What time frame for measurement?

11/12/2015



DC

AK

HI

ME

RI

VTNH

NYCT

PANJ

MD

DE

VAWV

NC

SC

GA

FL

ILOH

IN

MIWI

KY

TN

ALMS

AR

LATX

OK

MOKS

IA

MNND

SD

NE

NMAZ

COUT

WY

MT

WA

OR

ID

NV

CA*

MA

Benefit Received

Services Received

Services Delivered

Other

MKT - Changed to Market effective in 14 or 15 Additional guidance expected soon

COP state – but public notices, rulings and/or DOR Audits Market Sourcing based on location of Customer

11/12/2015

Market Based Sourcing -FY 14 and Beyond


Other market sourcing challenges• Application of “look-through” sourcing

• Cascading approach

• “Readily determinable” challenges

• “Reasonable approximation” and default or safe harbor provisions

• Proration of receipts of benefit received in multiple states

• Sourcing of intercompany receipts

11/12/2015



Market Based Sourcing Methodologies:• Benefit Received – Ex. California –

Sales from services are in this state to the extent the purchaser of the service received the benefit of the services in this state. CA Rev. & Tax Code 25136(a)

"Benefit of a service is received" means the location where the taxpayer's customer has either directly or indirectly received value from delivery of that service. CA Reg. 25136-2(b)(1)

• Service Received – Ex. Minnesota - Receipts from the performance of services must be attributed to the state where the services are

received. MN Stat. 290.191.5(j)

• Service Delivered – Ex. Pennsylvania - Sales from the sale of service, if the service is delivered to a location in this State. If the service

is delivered both to a location in and outside this State, the sale is in this State based upon the percentage of total value of the service delivered to a location in this State. PA Stat. 7401(3)2.(a)(16.1)(C)(I)

• Customer Located – Ex. New York - Receipts from services …. shall be included in the numerator of the apportionment fraction if the

location of the customer is within the state. NY Laws 210-A.10.(a)

11/12/2015



Market Based Sourcing – Idaho

Cable One, Inc. v. Idaho State Tax Commission, Idaho Supreme Court No. 41305-2013, October 29, 2014

• The Idaho Supreme Court upheld a lower court’s decision that a taxpayer’s greater costs of internet access services were performed in Idaho.

• The taxpayer asserted that relevant costs for providing internet access services to Idaho customers should include total costs associated with its Arizona internet backbone facility.

• The Idaho Supreme Court disagreed, and identified costs that were allocated solely to Idaho activity and used those costs to evaluate where the greater costs of performance occurred.

2311/12/2015


Market Based Sourcing – Illinois

Illinois Private Letter Ruling IT 14-0003 PLR (April 24, 2014 released June 2014)

• The Illinois Department of Revenue ruled that agreements for information technology hosting and cloud computing are properly characterized as service contracts for Illinois sales factor apportionment purposes.

• Because taxpayer is engaged in provision of services, the Department ruled that receipts from those contracts should be sourced to Illinois if the services are received in the state.

2411/12/2015


Market Based Sourcing – Indiana

Letter of Findings No. 02-20130359, Indiana Dept. of Revenue, November 26, 2014

• The Department ruled that under the state’s income producing activity provisions, revenue from Indiana students receiving online instruction was attributable to Indiana.

• Indiana has adopted a ‘transaction’ based approach when applying a cost of performance apportionment methodology. Under this approach, only the direct activity for which value is exchanged is considered. In this instance, it was where the students purchased the services that controlled.

2511/12/2015


Market Based Sourcing – Minnesota

Lutheran Brotherhood Research Corp v. Commissioner of Revenue No. CX-02-1097 Feb 6, 2003.

• Corporate taxpayer sought review of a decision of the Commissioner of Revenue denying refund of corporate franchise taxes paid on fees for management services provided to mutual fund, based on reattribution of percentage of mutual fund investors who were located in Minnesota.

• Minnesota Supreme Court held that the “consumer” of benefits of management services provided to mutual fund was the mutual fund, not its ultimate investors, and thus fees collected for those services were properly allocated for tax purposes to the state in which fund was located.

2611/12/2015


Market Based Sourcing –New York

• NY is retaining a single receipts factor apportionment scheme for current Article 9-A taxpayers and is adopting a single receipts apportionment for taxpayers formerly subject to tax under Article 32.

• NY is implementing customer sourcing rules for all receipts included in the computation of business income.

• 8% election available for receipts from certain financial instruments.

• Many clients have had challenges with sourcing receipts in the past.

2711/12/2015


Market Based Sourcing –New York

• Addition of Sec. 210-A

• Single receipts factor to allocate business income and capital

• Customer sourcing rules• Tangible personal property and electricity

• Rentals and royalties

• Digital products*

• Variety of transportation businesses

• Variety of financial transactions

• *Hierarchy: • Digital Products:(1) customer’s primary use location, (2) where digital

product is received, (3) prior year, (4) current year for receipts that can be sourced using (1) and (2) where benefit received

• Other Business Services/Receipts: (1) where benefit is received, (2) delivery destination, (3) prior year, (4) current year for receipts that can be sourced using (1) and (2)

2811/12/2015


Market Based Sourcing – New York

In the Matter of the Petition of Expedia, Inc., et al, DTA Nos. 825025, 825026, February 5, 2015

• The receipts of an online travel reservation service were receipts from the performance of services and must, therefore, be sourced to where such services were performed, a New York administrative law concluded.

• The Division of Taxation improperly characterized the receipts as ‘other business receipts,’ and the ALJ rejected the attempt to impose customer based sourcing.

• Notably, the ALJ rejected the argument that human involvement at the moment of the transaction was required for the provision of a service.

• Additionally, the ALJ found that receipts from online advertising revenue were from ‘services’ rather than from ‘other business receipts.’

11/12/2015


Market Based Sourcing – Oregon

AT&T Corp. v. Department of Revenue, Or. Sup. Ct. No, SC S060150 (9/11/15)

• The Oregon Supreme Court rejected the taxpayer’s assertion that its costs in maintaining and operating its nationwide telecommunications network were included in the costs of providing interstate and international telecommunication services for purposes of souring revenue from such services.

• The court found that direct costs only include taxpayer’s incremental costs associated with each customer transaction and not costs to support its nationwide network.

• Accordingly, the taxpayer was unable to support its claim that the greater costs of providing its interstate and international telecommunications services occurred outside of Oregon.

3011/12/2015


Market Based Sourcing – Oregon

Powerex Corp. v. Dept. of Revenue 357 Or. 40 (Or. 3/26/15)• The Oregon Supreme Court ruled that sales of natural gas,

stipulated by the parties as tangible personal property, were sourced to their ultimate destination.

• Conditions of the sales such as title passing in Oregon did not alter the conclusion that sales of tangible personal property are sourced to their ultimate destination.

• The court also concluded that electricity is tangible personal property for income tax sourcing purposes.

3111/12/2015


Market Based Sourcing – Pennsylvania

Information Notice Corporation Taxes 2014-01, Pennsylvania Department of Revenue, December 12, 2014

• The Pennsylvania DOR released a notice to that provides taxpayers with guidance on sourcing the sales of services to the Commonwealth.

• The notice provides three rules for sourcing receipts from services, consistent with the market based sourcing requirements:

• Rule #1: If the service is delivered both to a location in and outside this State, the sale is in this State based upon the percentage of total value of the service delivered to a location in this State.

• Rule #2: If Rule #1 cannot be determined for a customer who is an individual that is not a sole proprietor, a service is deemed to be delivered at the customer's billing address.

• Rule #3: If the state or states of assignment under Rule #1 cannot be determined for a customer, except for a customer under Rule #2, a service is deemed to be delivered at the location from which the services were ordered in the customer's regular course of operations

3211/12/2015


Market Based Sourcing – South Carolina

Dish DBS Corp. f/k/a EchoStar, DBS Corp, and Affiliates v. South Carolina Department of Revenue, S.C. Admin. Law Court, No. 14-ALJ-17-0285-cc , February 10, 2015

• A digital television provider asserted that South Carolina law requires apportioning service revenue based on costs of performance.

• In an order denying motions for summary judgment, the South Carolina Administrative Law Court disagreed, in part, because ‘costs of performance’ language is absent from South Carolina’s apportionment statute.

• Proceedings before the court continue to determine the taxpayer’s income-producing activity and where such activity occurred

3311/12/2015


Market Based Sourcing – South Carolina

DIRECTV, Inc. & Subsidiaries v. South Carolina Department of Revenue, S.C. Admin. Law Court, No. 14-ALJ-17-0158-CC, May 12, 2015

• An Administrative Law Court determined that the primary income-producing activity of a satellite video provider includes customer subscriptions and delivery of a signal into customers’ homes.

• The taxpayer failed to meet its burden to prove, by a preponderance of the evidence, that ‘incidental’ services such as collecting programming content and beaming signals to satellites influenced customer decisions to purchase its services.

• The court reaffirmed South Carolina’s position that it does not adopt a cost-of performance sourcing methodology. Rather, it applies a ‘flexible’ income-producing activity standard.

3411/12/2015


Market Based Sourcing – Tennessee

H.B. 644, signed on May 20, 2015• For tax years beginning on or after July 1, 2016, a taxpayer will be required to

use market-based sourcing.

• The following receipts are sourced to Tennessee: • the sale, lease, rental or other use of real property if the real property is

located in Tennessee • the rental, lease, or license of tangible personal property if the property

is located Tennessee • sales of services, if and to the extent the service is delivered to a location

in Tennessee • the rental, lease, or license of intangible property if the property is used

in the state.

• Intangible property that is used in the marketing of a good or service is deemed to be used in the state if the good or service is purchased by a customer in Tennessee.

• If the state of assignment cannot be determined, then the state of assignment shall be reasonably approximated. Further, if the state of assignment cannot be reasonably approximated, then the receipts would be excluded entirely from the sales factor .

3511/12/2015


Market Based Sourcing – Texas

American Multi-Cinema, Inc. v. Attorney General of State of Texas, No. 03-14-00397-CV April 30 2015

• Texas Court of Appeals held that the company could include its exhibition costs in computing its cost of goods sold (“COGS”) deduction for purposes of the Texas margins Tax. In reaching this finding, the Court of Appeals concluded that exhibited films constituted tangible personal property rather than a service, as films are “perceptible to the senses”.

• The Court of Appeals ruled that AMC was entitled to deduct costs associated with the entire auditorium space as a direct cost of exhibiting the films, and was not limited to solely deducting costs associated with the light and sounds in the auditorium.

3611/12/2015


Market Based Sourcing – Wisconsin

Skechers USA, Inc. II v Wisconsin Department of Revenue Docket No. 10-1-173 July 31, 2015

• During calendar years 2000-2003 SKII licensed intangible property to parent company, which sold to customers in Wisconsin bearing and incorporating such intangible property.

• SKII had no property or employees in Wisconsin and did not file Wisconsin Corporate income franchise

• Wisconsin Tax Appeals Commission concluded that the state did not have the statutory authority to impose its income or franchise tax on an out-of-state company licensing intangible property to it instate affiliate because none of its income would be apportioned to Wisconsin under the sales factor. No income would be sourced to Wisconsin because the company’s cost of performing such licensing were outside Wisconsin.

11/12/2015


Market Based Sourcing – Polling Question

As states continue to shift towards Market Based Sourcing, how do you believe it will impact your business?

a) Very Negatively

b) Negatively

c) Neutral

d) Positively

e) Very Positively

3811/12/2015

PwC

Inclusion of Unique Items



Inclusion of Unique Items

Sales Factor•Receipts that can possibly be included in the sales denominator

• Proceeds from disposition of tangible and intangible assets

• Royalties or other payments from the sale, assignment or licensing of intangibles

• Foreign Royalties / Foreign Income

• Gross Receipts / Capital gains

• Futures/Hedging

• VAT tax

11/12/2015


Inclusion of Unique Items – Texas

Hallmark Marketing Co. LLC v. Combs, Tex. App. Ct., No. 13-14-00093-CV, November 13, 2014

• The Texas appellate court upheld the Comptroller’s determination that net loss from investment and capital asset sales could reduce a taxpayer’s franchise tax total gross receipts. Texas tax code provides that “only the net gain from the sale” of investment and capital assets are included in gross receipts.

• The court found reasonable a Comptroller rule stating that a net loss should be netted against other receipts for purposes of calculating the

denominator of the apportionment factor.

4111/12/2015


Inclusion of Unique Items – Utah

Taxpayer v. Auditing Division of the Utah State Tax Commission, Utah State Tax Commission, Dkt. No. 11-2285, October 2, 2013 (released August 2014)

• An Administrative Law Judge from the Utah State Tax Commission affirmed that income from the sale of partnership interest was business income to taxpayer. The judge found that the sale of partnership interest could generate business income under the functional test even without the existence of a unitary relationship.

• The Commission also found that including the sales proceeds in the sales factor denominator but not in the Utah numerator could result in the apportionment formula not being fair and, therefore, determined that the proceeds should be excluded from the sales factor altogether.

Please note that after this Tax Commission order was issued, the order was appealed to a further proceeding. The parties settled before the proceeding.

4211/12/2015

PwC

Alternative Apportionment



Alternative Apportionment-Equitable apportionment

UDITPA Sec. 18 provides for the use of an alternative method of apportionment where the statutory formula distorts the amount of income reported to a state with respect to a taxpayer’s level of activity in the state. • If the allocation and apportionment provisions of this Act do not

fairly represent the extent of the taxpayer's business activity in this state, the taxpayer may petition for or the [tax administrator] may require, in respect to all or any part of the taxpayer's business activity, if reasonable:- separate accounting;- the exclusion of any one or more of the factors;- the inclusion of one or more additional factors which will fairly

represent the taxpayer's business activity in this state; or- the employment of any other method to effectuate an equitable

allocation and apportionment of the taxpayer's income. 11/12/2015


Alternative Apportionment-Regulatory Framework

• The Multistate Tax Commission (“MTC”) recently revised its regulations:

- Former MTC Model Regulation IV.18(a) (emphasis added):

◦ Alternative apportionment allowed “only in limited and specific cases” and can be “invoked only in cases where unusual fact situations (which ordinarily will be unique and non recurring) produce incongruous results.”

- Current MTC Model Regulation IV.18(a) (July 29, 2010):

◦ Alternative apportionment allowed “only in limited and specific cases where the apportionment provisions... produce incongruous results.”

◦ Removes terms “unusual fact situations” and “unique and non recurring.”

11/12/2015


Alternative Apportionment-Constitutional framework

• The United States Supreme Court has held that a taxpayer has a constitutional right to alternative apportionment to remedy an unfair apportionment result

- The Constitution does not provide state revenue departments the right to alternative apportionment

• Hans Rees Sons (1931)

- “Out of all appropriate proportion”

• Norfolk & Western Railway (1968)

- “Grossly distorted result”

11/12/2015


Alternative Apportionment-Request for alternative apportionment

• States employ a variety of approaches for those seeking to use alternative apportionment

- File a petition in advance (before original return) – time periods differ

- File objections to standard formula with the return

- File and pay under original formula – then include a proposed adjustment

- Petitions must include statement of new method and why proposed alternative more clearly reflects income

- Department may invoke alternative apportionment formula

11/12/2015


Alternative Apportionment-Request for alternative apportionment (continued)• Require different standards of proof

- Standard formula does not fairly reflect the taxpayer’s in-state activities

- Incongruous results

- Distortion

- Taxes extraterritorial values

- Unreasonably and arbitrarily attributes income to state far out of proportion to the business transacted in the state

- Only in unusual circumstances

11/12/2015


Alternative Apportionment – Has the Bar Been Lowered?

• Decisions in Vodafone, CarMax and Equifax

• State taxing authority allowed to invoke alternative apportionment under their discretionary authority based on the statutory method failing to reflect business done in the state.

• Courts allowed the use of alternative apportionment in cases that were arguably not unique or unusual.

• Seemingly low hurdle to meet the burden of proof that the alternative formula better reflected in state activities.

11/12/2015


Alternative Apportionment-Mississippi

Equifax, Inc. and Equifax Credit Information Services, Inc. v. Dept. of Rev., Miss. No. 2010-CT—01857-SCT, June 20, 2013.• On audit, Department invoked alternative approach – a market based

sourcing method, and issued assessment.

• Trial court upheld assessment.

• The appeals court concluded that deference to the Department’s use of alternative apportionment would interfere with the court’s ability for a “de novo” review and that as the party invoking alternative apportionment, the Department had the burden to prove standard apportionment method was not a fair representation of taxpayer’s in-state business activity.

• State Supreme Court reversed – burden is on the taxpayer.

11/12/2015


Alternative Apportionment- Mississippi Legislation

H.B. 799, signed by the governor on April 20, 2014

• In response to Equifax, the bill provides two procedural changes:

1) the party that asserts the application of alternative apportionment has the burden of proof in administrative and judicial proceedings and

2) generally, proceedings before the Board of Tax Appeals require a hearing on all factual and legal issues raised by the taxpayer.

• Additionally, the new law limits the Department’s power to force combined filings by imposing a high burden of proof standard and suspending the Department’s power until regulations are enacted. The new law also restricts the imposition of penalties when deficiencies result from assertions of alternative apportionment.

• The new law is effective January 1, 2015.

5111/12/2015


Alternative Apportionment- New York

In the Matter of the Petition of The McGraw-Hill Companies., New York City Tax Appeals Tribunal, ALJ Division, TAT (H) 10-19 (GC) et al., February 24, 2014

• In a New York City Tax Appeals Tribunal Administrative Law Judge decision, a financial information publisher providing credit ratings to the public received discretionary authority to use an alternative allocation method calculated on an audience-based measure.

• Taxpayer was entitled to use allocation method similar to what the City allows other members of the press to use, since First Amendments protections generally extend to providing certain financial information to the public.

5211/12/2015


Alternative Apportionment – South Carolina

Carmax Auto Superstores West Coast, Inc. v. South Carolina Department of Revenue, S.C. Sup. Ct., No. 27474, December 23, 2014• The South Carolina Supreme Court held that the party seeking to deviate

from a statutory apportionment formula bears the burden of proving beyond a preponderance of the evidence that

- (1) the statutory formula does not fairly represent the taxpayer’s business activity in the state; and

- (2) its alternative accounting method is reasonable.

- There is no further requirement (as provided by the lower court) that the proponent prove its method is the most reasonable. The court suggested that a taxpayer’s motives and lower tax provide insufficient support for whether the statutory formula fairly represents in-state activity

11/12/2015


Alternative Apportionment- TennesseeVodafone Americas Holdings, Inc. v. Roberts, Tenn. App. Court, No. M2013-00947-COA-R3-CV, June 23, 2014

• A Tennessee appellate court upheld the Tennessee Commissioner of Revenue’s discretion to use an alternative method of apportionment because the statutory cost of performance method did not fairly represent the extent of the taxpayer’s business activity in the state.

• The court also determined that the method employed by the Commissioner, which was similar to a market-based approach, satisfied regulatory standards for the imposition of alternative apportionment.

5411/12/2015

PwC

MTC Election Update



MTC Election – California

The Gillette Company & Subsidiaries et al. v. Franchise Tax Board, No. A130803, July 24, 2012

• The California Court of Appeal held that the Multistate Tax Compact is a valid interstate compact binding California to provisions that include the equally weighted apportionment provision, which is codified under California law.

• Having entered into the Compact, California cannot, by subsequent legislation, unilaterally alter or amend its terms.

• California can avoid the application of the apportionment election only by repealing the statutory provision adopting the Compact, thereby withdrawing from the Compact.

• Since California has not withdrawn from the Compact by repealing the statute, the equally weighted apportionment election is available to taxpayers.

5611/12/2015


MTC Election – California (continued)

The Gillette Company & Subsidiaries et al. v. Franchise Tax Board, No. A130803, July 24, 2012

• August 8 – FTB petitioned for rehearing.

• August 9 - On its own motion and for good cause, “this court hereby orders rehearing in this case. The decision and opinion in this case are hereby vacated. Pending any further order by the court, additional briefing from any party or any amicus curiae is not requested.”

• November 13 - The California Franchise Tax Board petitioned the California Supreme Court for review of the Court of Appeal's decision.

• Update: September 3, 2015, the California Supreme Court ordered arguments to be heard in San Francisco on October 6, 2015.

5711/12/2015



S.B. 1015, signed on June 27, 2012 (not by a 2/3 majority)

- Withdraws California from MTC.

• MTC.gov listed California as an Associate and Project Member of the MTC

- Compact Members – Enacted MTC in law. Dues based 1/10th equal share and balance on proportionate share of taxes. Cal paid about 10% of the dues.

- Sovereignty Members - Sovereignty Members pay same fees. Representatives of Sovereignty Members shall be entitled to participate without a vote in meetings of the Executive Committee or the Commission, but are not eligible to serve as an elected member of the Executive Committee.

- Associate and Program Members – Pay for specific programs like Nexus

5811/12/2015



S.B. 1015, signed on June 27, 2012 (cont’d)

- SEC. 5. The Legislature finds and declares the following:a) The doctrine of election (see generally Pacific Nat. Co. v. Welch (1938) 304

U.S. 191), provides that an election affecting the computation of tax must be made on an original timely filed return for the taxable period for which the election is to apply and once made is binding

b) The doctrine of election described in subdivision (a) applies to any election that affects the computation of tax under Part 10 (commencing with Section 17001), Part 10.2 (commencing with Section 18401), and Part 11 (commencing with Section 23001) of Division 2 of the Revenue and Taxation Code, unless otherwise provided.

c) Subdivision (b) does not constitute a change in, but is declaratory of, existing law.

- SEC. 6. The repeal of Part 18 (commencing with Section 38001) of Division 2 of the Revenue and Taxation Code in Section 1 of this act shall not be construed to create any inference that a change in interpretation with respect to that part, or any reference to that part, prior to its repeal is implied by this act.

5911/12/2015

60PwC

MTC Election – OregonHealth Net, Inc. v. Department of Revenue, No. TC 5127, September 9, 2015• In a summary judgment order, the Oregon Tax Court held that a taxpayer

could not make the Multistate Tax Compact’s equally-weighted three-factor apportionment election. The taxpayer challenged the state’s 1993 law change providing that Oregon’s single sales factor apportionment provisions control when they are inconsistent with Compact apportionment provisions.

• The court found that the law change did not violate the state or federal Contract Clauses because the Compact did not constitute a binding state contract due to the absence of consideration and “unambiguous terms to create a statutory contract.”

• The court also found that the law change did not violate the federal Compact Clause because the Compact Clause does not create a limitation on a state’s legislature regarding compacts, like the Multistate Tax Compact, that do not have congressional approval


61PwC

MTC Election – Michigan

International Business Machines Corp. v. Department of Treasury, Mich. Supreme Court Docket No. 146440, July, 14, 2014

• The Michigan Supreme Court held that IBM was entitled to use the Multistate Tax Compact’s elective three-factor apportionment formula to calculate its 2008 Michigan business tax.

• The court also held that the modified gross receipts component of the tax fit within the broad definition of an income tax under the Compact, thereby allowing IBM to use the Compact’s elective formula for this portion of the tax base.


62PwC

MTC Election – Michigan (continued)International Business Machines Corp. v. Department of Treasury, Mich. Supreme Court Docket No. 146440, July, 14, 2014

UPDATE:

• On June 4, 2014, the Michigan Office of Attorney General filed a Motion for Rehearing [International Business Machines v. Michigan Department of Treasury, Motion for Rehearing of Appellee Department of Treasury of the State of Michigan (August 4, 2014)].

• The Attorney General also filed on August 4 a Motion to Stay on the July 14, 2014 decision [International Business Machines v. Michigan Department of Treasury, Motion to Stay the July 14, 2014 Opinion and Motion for Immediate Consideration (August 4, 2014)].

• On August 11, 2014, IBM filed a response in the Michigan Supreme Court opposing the motions to reconsider and stay [International Business Machines v. Michigan Department of Treasury, Response in Opposition to Treasury’s Motion for Rehearing and Treasury’s Motion to Stay the July 14, 2014 Opinion and Motion for Immediate Consideration of Motion to Stay (August 11, 2014)]. 11/12/2015COST Mid-West Regional State Tax Seminar

63PwC

MTC Election –Michigan (continued)International Business Machines Corp. v. Department of Treasury, Mich. Ct. Claims, No. 11-000033-MT, April 28, 2015

UPDATE:

• On April 28, 2015, the Michigan Court of Claims ruled that IBM, which had previously prevailed at the Michigan Supreme Court in its argument that it was entitled to use the Multistate Tax Compact’s equally weighted three factor formula, could not make the election because the state in 2014 retroactively repealed the Compact effective January 1, 2008.

• On September 29, 2015, the Michigan Appellate Court upheld the state’s retroactive repeal of its membership in the Multistate Tax Compact. The court determined that the Compact was not a binding contract under state law and therefore the retroactive repeal did not violate state or federal contract clauses. The court also held that the retroactive repeal did not violate state or federal due process clauses for a number of reasons, including the determination that taxpayers did not have a vested right in the state’s tax laws.


64PwC

MTC Election – Michigan (continued)Other Michigan MTC Cases

• Yaskawa America, Inc., v. Dept. of Treasury, No. 11-000077-MT, December 22, 2014 and,

• Ingram Micro Inc. v. Dep't of Treasury; Case No. 11-000035-MT, December 19, 2014

• The Michigan Court of Claims granted summary judgment to the Department of Treasury, ruling that Michigan Public Act 282 of 2014 was a valid legislative act that retroactively repealed the Multistate Tax Compact in the state.

• Lorillard Tobacco Company v. Department of Treasury, Mich. Ct. App., Docket No. 313256, September 16, 2014

• The Michigan Court of Appeals held that the Michigan Supreme Court’s decision in IBM v. Department of Treasury is dispositive on whether Lorillard could elect to use the three-factor apportionment formula under the Multistate Tax Compact.

• The Court also held that Lorillard was entitled to have penalties waived because it had correctly reported its income under the three-factor apportionment formula.

• Additionally, on December 19, 2014, the Court of Claims, has dismissed 54 cases in which taxpayers were seeking Michigan Business Tax refunds.


65PwC

MTC Election – Michigan (continued)EMCO Enterprises v. Department of Treasury, Mich. Ct. Claims No. 12- 000152-MT, April 21, 2015• The Michigan Court of Claims made several findings regarding the

application of the Multistate Tax Compact to the former Michigan Single Business Tax (SBT), including:

1. the SBT is an ‘income tax’ for purposes of the Compact, 2. future Michigan legislatures were not bound by the state’s adoption

of the Compact because the Compact is not a binding compact under federal law nor a binding contract under Michigan law,

3. the SBT’s mandatory apportionment provisions conflict with the Compact’s elective provisions,

4. the SBT’s mandatory apportionment provisions repealed by implication the Compact elective provisions and therefore SBT apportionment applies, and

5. the denial of an equally weighted three-factor formula did not violate the taxpayer’s Commerce Clause or Due Process Clause protections under the US Constitution.


66PwC

MTC Election – Minnesota

Kimberly-Clark v. Commissioner of Revenue, Minnesota Tax Court, No. 8670-R, June 19, 2015

"If appellants prevail in this matter, the state will have to refund up to a total of $700 million to affected multistate taxpayers." Alan Gilbert (Minnesota Solicitor General).

• The Minnesota Tax Court granted summary judgement to the Minnesota Commissioner of Revenue. The Court ruled that the Compact did not contain a clear and unmistakable promise that the state would not alter or repeal the election. Therefore the Compact would not be enforceable as a government contract.

• Kimberly-Clark has appealed to the Minnesota Supreme Court.


67PwC

MTC Election – TexasGraphic Packaging v. State of Texas NO. 03-14-00197-CV 07/28/2015

• Graphic filed amended Texas franchise tax returns for 2008 and 2009 and an original return for 2010 using the equally weighted three factor formula found in the Multistate Tax Compact and incorporated into the Texas tax code.

• The Comptroller denied Graphic’s refund claims and upheld a 2010 assessment. This decision is consistent with two prior Comptroller rulings.

• Graphic filed a petition before the Travis County District Court claiming, among other things, that the franchise tax is an income tax, it properly elected the Compact’s three factor apportionment method and the franchise tax single factor violates the Constitution.

• On July 28, 2015, the Texas Court of Appeals, Third District, determined that the Texas Franchise Tax is not a tax imposed on net income for Multistate Tax Compact purposes and therefore the Compact’s three-factor apportionment formula provisions were not available to the taxpayer.



MTC Election -Polling Question

Has your company made an MTC Election in any State?

a) Yes

b) No

c) Still Considering

6811/12/2015

Conclusion

This document is for general information purposes only, and should not be used as a substitute for

consultation with professional advisors.

This document was not intended or written to be used, and it cannot be used, for the purpose of avoiding U.S. federal, state or local tax penalties.

This document has been prepared pursuant to an engagement between PricewaterhouseCoopers LLP and its Client and is intended solely for the use and benefit of that Client and not for reliance by any other person.

© 2015PwC. All rights reserved. In this document, "PwC" refers to PricewaterhouseCoopers LLP, a Delaware limited liability partnership, which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity.

• Clear nationwide trend to single sales factor

• Market based sourcing provisions are different among the states and are ripe for opportunity and risk

• New York’s 8% investment income provision is clearly unconstitutional based on Wynn

• Investment, capital gain and hedging income should be evaluated to determine denominator impact

• Evaluate different profit margin activity to determine if alternate apportionment should be requested

Contact Information

This document is for general information purposes only, and should not be used as a

substitute for consultation with professional advisors.

This document was not intended or written to be used, and it cannot be used, for the purpose of avoiding U.S. federal, state or local tax penalties.

This document has been prepared pursuant to an engagement between PricewaterhouseCoopers LLP and its Client and is intended solely for the use and benefit of that Client and not for reliance by any other person.

© 2015PwC. All rights reserved. In this document, "PwC" refers to PricewaterhouseCoopers LLP, a Delaware limited liability partnership, which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity.

• Maureen Pechacek, Partner- Phone number: 612-326-2046- Email: [email protected]

• David Buschko, Director- Phone number: 612-596-6359- Email: [email protected]

mailto:[email protected]

mailto:[email protected]

PwC

Thank you


Latest Developments in Sales Factor Trends Including Market Based Sourcing COST: Mid-West Regional...

Documents

Transcript of Latest Developments in Sales Factor Trends Including Market Based Sourcing COST: Mid-West Regional...