National Trends in State and Local Tax Sigel-State Local Tax...Sales tax Independent Tax Tribunals...
Transcript of National Trends in State and Local Tax Sigel-State Local Tax...Sales tax Independent Tax Tribunals...
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61st Tulane Tax Institute National Trends in State and Local
Tax
Overview
Nexus Income tax Sales tax
Independent Tax Tribunals Apportionment
Forced Combination Alternative apportionment Procedural Fixes
MTC election Market based sourcing Addback Manufacturing Exemptions Due Process
Penalties Retroactivity
Nexus: Income Tax
Expansion of Physical Presence
Telecommuting Employees
Telebright Corporation, Inc. v. Director, Superior Court of New Jersey, No. A-5096-09T2, March 2, 2012
Appeal of Warwick McKinley, Inc., California State Board of Equalization, No. 489090, Jan 11, 2012
Third Party Servers
Ruling of the Tax Comm’r No. 12-36, Va. Dep’t of Revenue (Mar. 28, 2012) (server owned by taxpayer, but operated by third party, is not a protected activity under P.L. 86-272 and may establish substantial nexus with the state)
Nexus: Income Tax
Economic Nexus
Griffith v. ConAgra Brands, Inc., 728 S.E.2d 74 (W.Va. 2012)
Economic presence rather than physical presence is proper test for state income tax nexus
DPC violation: no purposeful direction where ConAgra did not exercise control over intangibles after licensing
CC violation: no economic presence where activity did not go beyond licensing
Compare: KFC Corp. v. Iowa Dept. of Revenue, 792 N.W.2d 308 (Iowa 2010)
Licensing of intangibles sufficient to establish minimum contacts and substantial nexus
Nexus: Sales and Use Tax
Click through Nexus Litigation:
Amazon.com, LLC v. New York State Department of Taxation and Finance, et al., 913 NYS2d 129 (N.Y. App. Div. 2010)
Statute setting up presumption that click through relationship establishes nexus is facially constitutionally
Performance Marketing Association, Inc. v. Hamer, Ill. Cir. Ct. Cook County, No. 2011-CH-26333 (May 7, 2012)
Failure to require substantial nexus violates commerce clause
Statute is also preempted by Internet Tax Freedom Act moratorium on taxes that discriminate against e-commerce
Nexus: Sales and Use Tax
Click through Nexus Developments: Arkansas Ark. Code. §26-52-117
California Enacted affiliate nexus statute (A. 28) in June 2011 and then temporarily repealed
it
If Congress would have enacted a national solution by July 31, 2012, the repealed law would have been re-enacted on January 1, 2013; because it was not, the statute was re-enacted on September 15, 2012
Connecticut Conn. Gen. Stat. §12-407(a)(12)(L) and §12-407(a)(15)(A)(x)
Georgia Ga. Code Ann. §48-8-2(8)(M)
New York N.Y. Tax Law §1101(b)(8)(iv)
North Carolina N.C. Gen. Stat. §105-164.8(b)
Rhode Island R.I. Gen. Laws §44-18-15(a)(2)
Nexus: Sales and Use Tax
Click through Nexus Developments: South Dakota S.D. Codified Laws §10-63
Tennessee Entered into an agreement with Amazon.com to start collecting use taxes in 2014
(recently enacted by H.B. 2370 (Laws 2012))
Amazon is already notifying taxpayer of obligations to remit the taxes and Tennessee’s tax revenues are already showing it
Texas Governor vetoed H. 2403 affiliate nexus statute but then signed S1 containing the
same provisions (July 19, 2011)
Amazon has settled with Texas and is collecting the tax
Vermont 32 Vt. Stat. Ann. §9701(9)(I)
Illinois (H. 3659)— struck down
Nexus: Sales and Use Tax
Affiliate Nexus
In-state affiliates activities can create nexus for e-retailer entity
New Mexico Tax & Rev. Dept. v. Barnesandnoble.com LLC, No. 31,231 (N.M. Ct. App., April 18, 2012)
Court held affiliate’s activities to promote shared trademark and online retailer created substantial nexus for online retailer
E-retailers with brick and mortar sites must be cautious about cross-promotional activities
Independent Tax Tribunals
Illinois enacted H.B. 5192 establishing independent tax tribunal
Concerns that normal state administrative agencies lack expertise and may not be impartial
“provides taxpayers with a means of resolving controversies that ensures both the appearance and the reality of due process and fundamental fairness”
Growing movement in other states
Georgia enacted H.B. 100 – tax tribunal begins Jan. 1, 2013
Alabama governor pocket vetoed S.B. 549, but enactment is expected in future
Forced Combination: Unitary Group
Taxation through unitary group theory
Costco Wholesale Corp. v. Department of Revenue, Oregon Tax Court, No. TC 4956, July 16, 2012
Court held that retailer’s foreign insurance company subsidiary’s income had to be included in consolidated corporate tax return.
Court recognized it could not tax or impose filing requirement on foreign insurance company, however, income could be included because state has ability to assess tax on the totality of income of a unitary group
Forced Combination: Unitary Group
Expansion of the unitary group concept Clarcor v. Hamer, Appellate Court of Illinois, First District,
No. 1-11-1674, May 11, 2012
Filtration and Packaging subsidiaries were one unitary group because all profits were disbursed to parent, pension plan was shared, and stock option compensation was based on performance of whole group
Appeal of Comcast Cablevision Corp., California State Board of Equalization, No. 424198, February 2, 2012
Board held that contribution or dependency test was an alternative to three unities test.
Board found QVC (channel) was part of unitary group even though it received no preferential treatment from Comcast and was operated independently.
Forced Combination: Penalties
Delhaize America, Inc. v. Lay, N.C. Court of Appeals, No. COA11-868, Aug. 21, 2012
Secretary of Revenue made a determination that returns should have been combined and imposed 25% negligence penalty
TP argued that penalty violated due process because of lack of notice and guidelines to educate taxpayers
Trial court held penalty violated due process
Court of Appeals overturned and upheld penalty
Notice existed due to previous Departmental decisions that demonstrated practice of forced combination
Alternative Apportionment
§18 of UDITPA provides for alternative apportionment
Drafters intended its use in unusual cases to prevent gross distortions
Many states have alternative apportionment statutes modeled after §18
States are increasingly applying §18 to taxpayer dissatisfaction
Alternative Apportionment
General Mills, Inc. v. Franchise Tax Board, No. A131477 (Cal. Ct. App. Aug. 29, 2012) (must consider both the extent of the quantitative distortion of income and qualitative difference in business activity when applying alternative apportionment)
CarMax Auto Superstores West Coast, Inc. v. South Carolina Department of Revenue, No. 4953, (S.C. Ct. App. March 14, 2012) (party seeking alternative apportionment has burden to prove (1) standard formula is not representative and (2) alternative accounting method was reasonable and more fairly representative)
Equifax, Inc. v. Department of Revenue, No. 2010-CA-01857-COA (Miss. Ct. of App. May 1, 2012) (party seeking alternative apportionment has burden of proof)
Alternative Apportionment: Procedural Fixes
Rulemaking June 30, 2011, North Carolina enacted H.B. 619 to amend
prior law and now authorizing Secretary of Revenue to re-determine income or combine returns
North Carolina has been very liberal in applying forced combination and alternative apportionment
North Carolina S.B. 824 would prohibit Secretary from re-determining income or forcing combination prior to rulemaking.
Legislation was enacted over concerns that re-determination guidelines would be implemented with directives rather than rules promulgated pursuant to the Administrative Procedures Act
MTC Election
The Gillette Company et al. v. Franchise Tax Board, 207 Cal.App.4th 1369 (Op. on Rehearing, Oct. 2, 2012) California legislature withdrew from MTC on July 27
Nonetheless, court for the most part reaffirmed July 24 opinion
TPs were entitled to use MTC formula
Statute was unconstitutional for years in issue
Court refused to address validity of repeal
Issue also pending in other states:
International Business Machines, Corp v. Dep’t of Treasury, Docket No. 306618 (Michigan)
Texas Comptroller denies MTC election: SOAH DOCKET NO. 304-12-5984.13
Market Based Sourcing of Services
Growing enactment of market based sourcing California (Cal. Rev. & Tax. Code §25136(b)) Georgia (Ga. Code Ann. §48-7-31(d)(2)(A)(i)) Illinois (35 ILCS 5/304(a)(3)(C-5)(iv)) Iowa (Iowa Admin. Code r. 701-54.6(422)) Maine (Me. Rev. Stat. Ann. tit. 36, §5211(16-A)(A)) Maryland (Md. Regs. Code §03.04.03.08(C)(3)(d)) Michigan (Mich. Comp. Laws §206.665(1)(e)) Minnesota (Minn. Stat. § 290.191(5)(i)) Ohio (Ohio Rev. Code Ann. §5733.05(B)(2)(c)(ii)) Oklahoma (Okla. Admin. Code §710:50-17-71(1)(A)(ii)) Utah (Utah Code Ann. §59-7-319(4)) Wisconsin (Wis. Stat. § 71.25(9)(dh); Wis. Stat. § 71.25(9)(dk))
Market Based Sourcing of Services
Different Approaches
Georgia: proportional to benefit received
Maryland: impetus for sale
Minnesota: cascading rule
Illinois: market-based sourcing plus throw-out rule
Utah: preponderance rule
Addback
Addback: disallowance of the deduction taken for interest and intangible-related expenses between related parties
Alternative: direct taxation of intangible holding company Nexus issues
Novel approach of Tennessee 2012 Tenn. Pub. Law 842, §§ 1-5
TP must file an application with Department of Revenue in order to deduct an intangible expenses paid to affiliate
Easier to administer addback and disallow intangible-related expenses
Addback Exceptions
Common exceptions Foreign treaty exception: recipient is a resident of a nation with a US
tax treaty
Conduit exception: recipient does not qualify as related party
Subject to tax exception: state imposes income tax on recipient
Wendy's International Inc. v. Virginia Dept. of Taxn., CL09-3757 (Va. Cir. Ct., City of Richmond, March 29, 2012) Conduit exception applied because holding company derived over
1/3 of gross revenues to unrelated parties
Company did not directly license to unrelated parties. Court applied pass-through concept to find that 1/3 of gross revenues were indirectly derived from unrelated parties.
Manufacturing Exemptions
States use a variety of standards and definitions
Opportunity for creative arguments Indiana Department of State Revenue Letter of Finding No. 04-
20110559 (May 30, 2012) (asphalt storage tanks eligible for manufacturing exemption because taxpayer used them in manufacturing process)
Virginia Letter Ruling No. 12-48 (April 23, 2012) (department rejected taxpayer argument that applying labels legally necessary for distribution was part of manufacturing process)
Detroit Edison Company v. Dept. of Treasury, No. 10-104-MT, Michigan Ct. of Claims (Mar. 28, 2012) (electricity production process does not cease until delivery to customer so transmission lines are eligible for manufacturing exemption)
Manufacturing Exemptions
Southwest Royalties, Inc. v. Combs, No. D-1-GNU-09-004282, Texas County Court (April 30, 2012)
Texas comptroller has policy of excluding oil and gas extraction equipment from manufacturing exemption
Taxpayer claimed well equipment was entitled to exemption because the equipment directly caused changes to the hydrocarbon products
Trial judge ruled from the bench in favor of taxpayer
Written decision issued on April 30 reversed earlier verbal ruling and rendered judgment for the state
Due Process: Penalties
State penalties have been increasingly draconian Delhaize America, Inc. v. Lay, N.C. Court of Appeals, No. COA11-
868, Aug. 21, 2012
Department assessed deficiency after forced combination of returns and assessed a negligence penalty for failure to combine
Court held no due process violation even though lack of taxpayer knowledge because prior decisions put taxpayer on notice
Marriott International Inc. v. Hamer, No. 09 L 051411 (Ill. App. Ct. Aug. 22, 2012)
Taxpayer filed state amended return after federal income tax audit re-determined income
Court upheld double interest penalty even though taxpayer had no knowledge of increased income tax liability during that period
Decided on statutory interpretation rather than due process grounds
Due Process: Retroactivity
General Motors Corporation v. Department of Treasury, No. 291947 (Mich. Ct. App. October 28, 2010) The Legislature legislated previous appellate decision out of
existence, thus retroactively eliminating GM’s claim for refund
The Appeals Court held that the retroactive application did not violate GM’s right to due process
The Act was related to a legitimate purpose (e.g., preventing unanticipated massive claims for refund that were collected in good faith)
The statutory language covered all taxpayers and GM did not have a vested right to the refund
US Supreme Court denied cert. January 23, 2012
Questions
Doug Sigel
Ryan Law Firm, LLP