Mid-Atlantic Current Developments

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Mid-Atlantic Current
Developments
Council on State Taxation
March 19, 2015
Scott Austin, Jennifer Howard & Nicholas
Stratis
Agenda
I.
Corporate Income Tax Developments
A.
New York City Tax Reform
B.
Connecticut FY 2016-FY 2017 Governor’s Budget
C.
District of Columbia
D. Pennsylvania
E.
Maryland
F.
New Jersey
G. Related Party Addbacks
H. Pennsylvania Board of Finance and Revenue Decisions
*Note: Recent developments in sales factor sourcing will be addressed in the Market-Based Sourcing discussion.
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Agenda Continued
II. MTC Transfer Pricing Program
III. Sales and Use Tax Developments
A.
Pennsylvania Board of Finance and Revenue Decisions
B.
New York City Tax Reform
C.
Connecticut FY 2016-FY 2017 Governor’s Budget
D. District of Columbia Emergency Legislation
E.
Cloud Computing Updates
F.
Attributional Nexus
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Learning Objectives
•
Understand the recent changes to the New York City tax laws
• Identify developments and trends in corporate income tax across the Mid-Atlantic,
including related party addback issues
• Discuss significant legislation and case law throughout the Mid-Atlantic and the
potential impact on businesses
• Become familiar with the goals of the MTC transfer pricing program and the services it
will offer to businesses
•
Recognize recent changes to sales and use tax in the Mid-Atlantic,
• Examine current trends in attributional nexus legislation, including the MTC draft
click-through and affiliate sales and use tax nexus model statute
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I. Income tax developments
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New York City Tax Reform – What’s Included
• A 3009/S 2009
- Subject banks and general business corporations to same tax –
based on existing tax on general business corporations
- Modified corporate tax
- Expanded economic nexus standards (based on $1 M receipts
threshold)
- Single receipts factor, customer sourcing (phased in)
- Unitary combination – repeal of substantial intercorporate
transaction rules
- Manufacturer / smaller bank tax benefits
•
If enacted, the reform is expected to be retroactive to January 1,
2015.
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New York City Tax Reform – What’s Not Included
• S corporations excluded from reform
• Unincorporated Business Tax not amended
• No reinstatement of tax on nonresident earnings
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Tax Bases & Rates
• Eliminate subsidiary capital tax and minimum taxable income bases
• Highest of:
- Business income tax: 8.85% (less if business receipts <$3 M)
◦ Qualified NYC manufacturers: 4.425% to 8.85%
- Business capital base tax: 0.15% (subject to cap)
◦ $10,000,000 (previously $1 M)
◦ No phase out
- Fixed dollar minimum:
◦ NYC receipts more than $250 M but not over $500 M: $50,000
◦ NYC receipts more than $500 M but not over $1 B: $100,000
◦ NYC receipts over $1 B: $200,000
• Plus, if combined group: fixed dollar minimum of each taxable member
• Business income tax: 8.85% (less if business income <$3 M)
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Nexus
• General Corporation Tax would apply to corporations “deriving receipts from activity
in the city”:
- $1 M of receipts from NYC sources (i.e., included in the NYC apportionment factor
numerator)
- Combined Group: $1 M receipts from NYC sources with consideration of those
members with at least $10,000 of receipts from NYC sources
• Incorporation of Banking Corporation Tax credit card nexus rules:
- Issued credit cards to ≥1,000 NYC customers
- Entered into merchant contracts with merchants in ≥1,000 NYC locations
• Annual review by Commissioner
- Update receipts and customer thresholds based on changes in CPI
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Combined Reporting
•
Repeals provisions that require combination based on the existence of substantial
intercorporate transactions
•
Replaced with unitary water’s edge combined reporting regime
•
50% Ownership Test: A combined report is required if a taxpayer owns or controls either:
•
-
directly or indirectly, more than 50% of the capital stock of one or more other
corporations, or
-
more than 50% of the taxpayer’s capital stock is owned or controlled either directly or
indirectly by one or more other corporations, or
-
more than 50% of the capital stock of which, and the capital stock of one or more other
corporations, is owned or controlled, directly or indirectly, by the same interests, and
Unitary Test: is engaged in a unitary business with those corporations
-
•
Unitary business not defined
“Cross article” combination: Banks and general business corporations combinable
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Combined Reporting
•
•
Corporations included:
-
Domestic corporations satisfying the ownership test
-
Alien corporations satisfying the ownership test and
◦
Treated as a domestic corporation under IRC § 7701, or
◦
Have effectively connected income for the taxable year
-
Captive REITs and captive RICs that are not required to be included in a combined
insurance tax report
-
Captive insurance companies (repeal of “overcapitalized” provisions)
-
Railroad / trucking companies no longer prohibited from being in a group with taxpayers
using a different allocation methodology.
Corporations specifically excluded:
-
Non-captive REITs, RICs, and insurance companies
-
S corporations
-
Corporations subject to the General Corporation Tax solely due to ownership in a limited
partnership doing business in NYC
-
Alien corporations with no effectively connected income
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Combined Reporting
• Commonly-owned Group Election: Election to file combined report including all
corporations that meet the 50% ownership test, regardless of whether the group is
conducting a unitary business.
- Must be made on an original, timely-filed return
- Irrevocable and binding for the taxable year and the next six years
- Automatically renewed for an additional 7 years unless revoked on the original,
timely filed return for the first year after the 7-year period
- If election is not renewed, election cannot be made for the next 3 years
- Any corporation subsequently entering into the electing group and meeting the
ownership requirement is deemed to have made election.
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Income Base – Overview
• Entire net income tax base eliminated
• Replaced with the business income base:
- Entire net income less
◦ Net investment income
◦ Other exempt income
• Investment income no longer allocated based upon investment allocation percentage;
exemption for investment income net of attributable interest expenses
• Repeal of cash election; cash treated as business capital
• Starting point still based upon federal taxable income (line 28)
• Most ENI modifications are retained
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Income Base – Investment Income
• Investment capital is significantly limited to include only equity securities that are
held by the taxpayer for more than six consecutive months but are not and have never
been used by the taxpayer in the regular course of business.
• Non-Unitary Requirement: stock in a corporation conducting a unitary business
does not constitute investment capital
- Presumption of non-unitary where voting stock <20%
• 6-Month Holding Period: if held on last day of taxable year, presumed to be held
for more than six consecutive months only if still holding the stock when filing an
original return
• Attribution of Interest Expense: Interest deductions attributable to investment
capital must be subtracted from investment income. Non-interest deductions no
longer subject to attribution.
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Income Base – Investment Income
• 40% Election / Safe Harbor: In lieu of subtracting interest expenses attributable to
investment capital, taxpayer may elect to reduce investment income by 40%
- Performed on a combined “one company” basis
- If election made, applies to all members of a combined group
- Direct attribution
- The same method for attributing expenses, either the safe harbor method or the
actual attribution method, must be used for both investment income and other
exempt income
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Polling Question 4
Does New York City Tax Reform include the repeal of the substantial
intercorporate transaction rules?
a) True
b) False
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Net Operating Losses
• Pre Apportioned → Post Apportioned
• Repeal of Federal Limitation: no longer limited to Federal NOLD amount / source
year
• Repeal of Allocation Requirement: repeal of GCT requirement to allocate NOLD
between investment and business income
• 20-year carryforward, no carryback
• Subject to Tax Requirement continued: NOLD is not allowed for an NOL
sustained during any year in which the corporation generating the loss was not subject
to tax in NYC under the GCT
• Computation of NOLD: maximum NOL deduction would be the amount that
reduces the taxpayer’s tax on allocated business income to the higher of the tax on the
capital base or the fixed dollar minimum tax
• Continue to follow the SRLY rules / IRC §§ 381, 382
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Prior NOL (PNOL) Conversion Subtraction
• Pre-2015 NOLs converted to subtraction
• (1) product of:
- the pre-apportioned “unabsorbed net operating loss” at the end of the base year
- Base year business allocation percentage (using the pre-reform sourcing rules)
- Base year tax rate (8.85% )
• (2) divide (1) by 8.85% = PNOL conversion subtraction pool
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Prior NOL (PNOL) Conversion Subtraction
• “Unabsorbed net operating loss” means the unabsorbed portion of net operating loss
as calculated under paragraph (f) of subdivision eight of section 11-602 of this chapter
or subdivision (k-1) of section 11-641 of this chapter as such sections were in effect on
December thirty-first, two thousand fourteen, that was not deductible in previous
taxable years and was eligible for carryover on the last day of the base year
subject to the limitations for deduction under such sections, including any
net operating loss sustained by the taxpayer during the base year.
• NOL carryover period refreshed; expires tax years beginning on or after January 1,
2036
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PNOL Conversion Subtraction – Combined
• 10%: The taxpayer’s PNOL for the taxable year will equal 10% of its PNOL conversion
subtraction pool plus any amount of unused PNOL conversion subtraction from
preceding taxable years
• Taxpayers may elect their PNOL conversion subtraction for tax years beginning after
January 1, 2015, and before January 1, 2017, to equal in each year up to 50% of its
PNOL conversion subtraction pool
• The taxpayer must make election on its return for the tax year beginning during 2015
• If a taxpayer makes this election, any remaining unused PNOL conversion subtraction
after such period shall be forfeited Subtraction calculated based on members of the
combined group as of the base year
• Separate PNOL conversion subtraction calculation if not member during the base year
• Add separately-computed subtractions together to find the group’s PNOL conversion
subtraction
• Leaving the group
- Former member takes proportional share of subtraction as determined in the base
year, with the combined group’s remaining PNOL conversion subtraction reduced
by such amount.
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Connecticut Governor’s Budget
•
A recent proposal by the Governor of Connecticut for FY 2016-FY 2017 proposes to
eliminate the business entity tax, close corporate tax loopholes, and maintain the
corporate tax surcharge.
•
Proposal seeks to help small businesses through elimination of the $250 business
entity tax.
•
However, the 20% corporate tax surcharge will remain indefinitely as proposed by the
Governor.
•
•
The surcharge was generally to have applied for income years beginning on or after
January 1, 2012, and before January 1, 2014, but legislation enacted in 2013
delayed the sunset.
•
Under the proposal, the surcharge would be made permanent effective January 1,
2016.
The Budget also proposes to limit the use of carryforward NOL’s and the use of tax
credits against the corporate net income tax and health provider tax.
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District of Columbia Emergency Legislation
On February 26, 2015, the District of Columbia FY2015 Budget Support Act of
2014 became law,1 which provides for the following tax reform:
•
The unincorporated and incorporated business franchise tax rate
will be phased in reductions in subsequent years to 8.25%.
• For taxable years beginning after December 31, 2014, the rate is
9.4%.
• Effective for tax years beginning after December 31, 2014, a single
weighted sales factor is adopted.
• Certain investment funds’ income is now exempt from the
Unincorporated Business Franchise Tax via a “trading safe
harbor.”
D.C. Act 20-0424 (B20-0750); Law Number L20-0155; http://lims.dccouncil.us/Legislation/B200750?FromSearchResults=true#
1
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District of Columbia
Microsoft Corp. v. Office of Tax and Revenue
• District of Columbia Office of Tax and Revenue (“OTR”) issued a notice of proposed
assessment based upon a transfer pricing analysis conducted by Chainbridge Software,
Inc. (“Chainbridge”).
• Chainbridge examined Microsoft’s 2002 financial information and determined that
Microsoft had underpaid its taxes for 2002 when it claimed a loss.
• OTR applied the determination to 2005-2006 when Microsoft carried the loss
forward.
•
Microsoft filed for summary judgment on the basis that the transfer pricing analysis:
1. Violates IRC 482 regulations, and
2. Fails to properly reconcile tax accounting with financial statement accounting.
• The D.C. Office of Administrative Hearings concluded that Chainbridge erroneously
analyzed Microsoft’s profit-to-cost ratio and included all of Microsoft’s transactions,
whether controlled or uncontrolled, in the analysis of its profit-to-cost ratio.
•
Victory for Microsoft with no appeal.
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District of Columbia—What’s Next after Microsoft?
•
BP Products North America Inc. v. District of Columbia
─ Bench ruling denies taxpayer motion for summary judgment.
─ Parties reach settlement.
•
Shell, Hess, and Exxon: Court rules for taxpayer citing non-mutual offensive
collateral estoppel.
─ Appeal on issue of collateral estoppel.
─ City argues that it is not bound by prior OAH decisions.
•
Several appeals in the pipeline.
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Pennsylvania FY 2016 Budget Proposal
• Governor Wolf proposed a budget on March 3, 2015 that would raise
an additional $4.55 billion in revenue while cutting the corporate
income tax rate.
• Key items include:
- Reduction of corporate income tax rate from 9.99% to 5.99% in
2017 and to 5% by 2018.
- Introduction of combined reporting.
- Reduction in NOL cap to $3 million or 12.5% of income.
- Phase out of capital stock/foreign franchise tax in 2016.
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Pennsylvania Bank Shares Tax
• On 2/17/2015, the Pennsylvania Department of Revenue (“Department”) reiterated its
clarification of a statutory inconsistency in the receipts factor apportionment provisions
of the Bank Shares Tax statute.
• The Bank Shares Tax requires an institution to include receipts from trading
assets/activities and investment assets/activities in the numerator of its receipts factor
through one of two methods.
• As enacted, Method 1 provides only a formula for including receipts of trading
assets/activities in the numerator of the receipts factor, but not investment
assets/activities.
• Therefore, if a taxpayer has receipts from investment assets/activities, the taxpayer
must use method 2 to determine the receipts for both trading assets/activities and
investment assets/activities.
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Pennsylvania
In re: UPS Worldwide Forwarding, Inc.
• Before the Pennsylvania BF&R, UPS argued that a substantial portion of its deliveries
to customers in Pennsylvania should not be included in the numerator because the costs
of performance were incurred outside of Pennsylvania.
• UPS submitted a detailed analysis demonstrating that a significant amount of the costs
incurred in performing delivery services were not location specific, but instead relate to
mobile assets and personnel.
•
The BF&R rejected this analysis in a decision issued 11/7/2014.
• BF&R instead determined that a package-by-package analysis, which UPS could not
provide, was necessary.
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Pennsylvania Realty Transfer Tax
Information Notice 2014-01
• Realty Transfer Tax Information Notice 2014-01, released October 17, 2014,
summarizes changes to the Realty Transfer Tax as made by Act 52.
•
Gross Receipts and Asset Tests: A real estate company is determined by taking
into consideration its real estate everywhere, rather than only real estate located in
Pennsylvania.
•
Expanded Definition of Real Estate Company: A corporation or an
association can be a real estate company, even if it does not own real estate.
•
•
A corporation or association that is owned by 35 or fewer persons and that has
assets, 90% of the fair market value of which are interests in one or more real
estate company, is a real estate company.
Binding Commitments and Options: A legally binding commitment or option
to transfer an interest in a real estate company, enforceable at a future date, is
deemed a transfer of an interest in a real estate company at the time of the
execution of the commitment or grant of the option.
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U.S. Supreme Court
Comptroller v. Wynne
• In November 2014, the U.S. Supreme Court heard oral arguments discussing the
constitutionality of Maryland’s personal income tax.
• Issue: Whether Maryland’s failure to provide resident taxpayers a credit for taxes they
pay other states on the income they earn in those states violates the Dormant Commerce
Clause?
•
Maryland’s personal income tax contains two separate parts:
1. The purely state component
2. County component, which is collected by the state but remitted to the taxpayer’s
county of residence.
•
Maryland imposes its tax on the residents’ entire income, no matter where the income
is earned.
•
However, Maryland does not offer residents a full credit for taxes paid to other states
on their out-of-state income.
•
The Wynnes are Maryland residents who earn much of their income outside of
Maryland, and therefore paid tax on this income to the states in which it was earned.
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U.S. Supreme Court
Comptroller v. Wynne (cont.)
•
•
•
Taxpayers’ Arguments:
•
Any state imposing an income tax must ensure that its scheme precludes the risk of
multiple taxation that would disadvantage interstate commerce.
•
The Commerce Clause operates to force states to structure their taxes in a way that
avoids double taxation, with the state of residency yielding to the state in which
income is produced.
Maryland’s Arguments:
•
A personal income tax that a state imposes on its own residents is constitutionally
distinctive due to the special relationship between a state and its residents, as
grounded in the special benefits the state provides to its residents.
•
Maryland is entitled to collect tax on 100% of its residents’ income, regardless of
whether other states attempted to tax the same income.
•
To the extent there is overlapping taxation, there is no reason that the state of
residence should be forced to subordinate its own interest.
The outcome is to be determined.
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Maryland Senate Bill 670
• Introduced to Maryland Senate February 6, 2015.
• Bill proposes mandatory unitary combined reporting for corporations
that are categorized under the NAICS as engaged in the “retail trade”
or in “food services and drinking places.”
• Specifically, the Bill proposes mandatory unitary combined reporting
for corporations that are:
"primarily engaged in activities that, in accordance with the
North American Industrial Classification System (NAICS),
United States Manual, United States Office of Management
and Budget, 2012 Edition, would be included in sector 44, 45,
or 722."
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Maryland Tax Court
ConAgra Brands Inc. v. Comptroller
• In the first published intangible holding company case since Gore Enterprise Holdings
Inc. v. Comptroller, the Maryland Tax Court interprets how unitary principles will be
used to find income tax nexus in Maryland.
•
Issue:
•
•
Whether a Nebraska company holding intellectual property for its corporate parent
had sufficient contacts with Maryland to require the filing of income tax returns in
Maryland?
Background:
•
ConAgra Brands Inc. (“Brands”) formed in 1996 to centralize the ownership and
protection efforts of the corporate group’s intellectual property.
•
Comptroller assessed Brands in 2007 for unpaid income taxes from 1996 to 2003,
alleging that the company lacked real economic substance separate from its
corporate parent.
•
Comptroller found Brands, therefore, had nexus with Maryland, despite not having
any physical contacts with Maryland.
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Maryland Tax Court
ConAgra Brands Inc. v. Comptroller (cont.)
• The Maryland Tax Court agreed with the Comptroller and determined that Brands had
no real economic substance.
• Brands has nexus with Maryland due to its parent company’s business in the state,
which actually produced Brands’ income.
• Although Brands has its own offices, officers, employees, and business activities, the
Tax Court noted that Brands was incorporated in part to obtain reductions in taxes.
• The Tax Court also pointed to the functional integration and centralized management
of Brands and asserted that Brands could not function as an independent business
without ConAgra’s support services.
• The court stated that the “unitary business principle does not confer nexus to allow a
state to directly tax a subsidiary based on the fact that the parent company is taxable and
the parent and subsidiary are unitary.”
• However, the court cited the factors commonly used in determining whether a unitary
business exists to establish that Brands lacked any economic substance apart from its
parent.
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Maryland Court of Appeals – Revisiting Gore
Gore Enterprise Holdings, Inc. v. Comptroller of the Treasury, Md. Ct. App., No 36
(March 24, 2014)
• The Maryland Court of Appeals ruled that two subsidiaries of an in-state parent had
nexus with Maryland because the subsidiaries had no real economic substance as
business entities separate from their parent.
• The court rejected the lower court’s ruling that established nexus between Maryland
and the subsidiaries due to their unitary relationship with their in-state parent.
• Although rejecting unitary nexus, the entities’ unitary relationship justified the state
applying to the subsidiaries an alternative apportionment formula that incorporated
unitary elements.
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NIHC, Inc. v. Comptroller of the Treasury
August 18, 2014
• The Maryland Court of Appeals held that the state’s requirement that related
corporations file separate income tax returns did not prohibit the state from taxing gains
deferred by an out of state subsidiary.
•
Background:
•
NIHC is a subsidiary of Nordstrom, a national retailer operating in Maryland.
•
NIHC did not conduct business or own tangible property in Maryland, but was
formed to license trademarks to Nordstrom.
•
Nordstrom entered into a licensing agreement with NIHC in which Nordstrom
authorized NIHC to license the use of Nordstrom’s trademarks in exchange for all
of NIHC’s stock.
•
Nordstrom later transferred the trademarks to NTN, another wholly owned
subsidiary of Nordstrom.
•
Finally, Nordstrom transferred the licensing agreement to a third subsidiary,
N2HC, as a dividend and began paying royalties to N2HC.
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NIHC, Inc. v. Comptroller of the Treasury
• The Maryland Court of Appeals upheld the Court of Special Appeals determination
that the state’s separate reporting requirement does not prohibit the Comptroller from
taxing NIHC’s IRC Section 311(b) gain on a deferred basis.
• The court noted that Maryland’s separate reporting requirement simply provides that
each member of an affiliated group shall file on a separate basis.
•
The statute, nor the regulations thereunder, does not address the treatment of IRC
section 311(b) deferred gain.
•
The Court of Appeals also stated that whether NIHC should have reported the entire
gain as income subject to Maryland income tax was a separate question from whether
the Comptroller could assess income actually reported by NIHC.
•
Ultimately, the court concluded that the separate reporting requirement does not
eliminate the tax liability for the income reported, properly subject to tax, and not
previously taxed.
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New Jersey - Toyota Motor Credit Corp. v. Director, Division
of Taxation, No. 002021-2010 , August 1, 2014
During tax years 2003 and 2004, taxpayer had federal NOL carryforwards
that included depreciation deductions (for federal tax purposes, taxpayer
disposed of vehicles and recognized depreciation recovery gain which was
attributable to the excess depreciation deductions which provided no benefit
to taxpayer for New Jersey CBT purposes).
• New Jersey suspended NOL carryforwards for the 2003 and 2004 tax years
and, therefore, taxpayer was unable to benefit under New Jersey law for
depreciation deductions available under federal law.
• Taxpayer disposed of vehicles in fiscal year 2003 and 2004. The Division of
Taxation required that the basis of these vehicles be adjusted down to
account for the depreciation deductions.
• The tax court found that these Depreciation Deductions provided taxpayer
no benefit for New Jersey Corporation Business Tax purposes. Accordingly,
the basis of taxpayer’s vehicles should not be reduced by the amount of the
Depreciation Deductions.
A similar outcome was provided in Ford Motor Credit Co. v. Director, Div. of
Taxn., No. 015751-2009 (8/5/14)(unpublished)
•
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Nationwide Trends – Related Party Addbacks
WA
MT
ME
ND
MN**
OR
VT
ID
WI
SD
MI
NY
IL
UT
NJ
DE
MD
OH
IN
WV
CO
KS
RI
PA
IA
NE
CA
MA
CT
WY
NV
NH
VA
MO
KY
DC
NC
TN
AZ
OK
NM
AR
SC*
MS
AK
TX
AL
GA
LA
HI
FL
Related member expense addback required (including DC, NYC)
Related member expense addback legislative proposals considered in recent years
No related party addback provisions imposed
Repealed in OR eff. 1/1/13 and in RI eff. 1/1/15
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*South Carolina disallows deductions for an expense between related
parties where a payment is accrued, but not actually paid and on interest
deductions on obligations issued as a dividend or paid instead of a
dividend
**Minnesota requires addback of interest and intangible expenses, losses,
and costs paid, accrued, or incurred by any member of the taxpayer's
unitary group to a foreign operating corporation that is a member of the
taxpayer's unitary business group.
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Related Party Addbacks
Virginia
S.B. 5001 Virginia’s budget bill, enacted on April 1, 2014
• The budget bill included limitations on the state’s subject to tax exception and
unrelated party addback exception.
• Subject to tax exception: 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.”
• Unrelated party exception: 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.”
• Both limitations are retroactive to taxable years beginning on and after January 1,
2004.
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Related Party Addbacks
Pennsylvania Intangible Expense Addback
•
Effective for tax years beginning on or after January 1, 2015, Pennsylvania requires a
Corporate Net Income Tax (“CNIT”) addback for intangible expenses and interest
expenses related to an intangible that are paid, accrued, or incurred directly or
indirectly in connection with one or more transactions with an affiliated entity.
•
For purposes of computing the addback, Pennsylvania provides the following credit
and exceptions:
•
Subject to Tax Credit: Taxpayer receives an apportioned credit to the extent the
addback is required and the affiliated entity was subject to a tax that includes the
intangible or interest payment in its tax base.
•
Exceptions:
(1) Principal purpose
(2) Foreign treaty
(3) Conduit
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Related Party Addbacks - New Jersey
Morgan Stanley & Co., Inc. v. Director, Division of Taxation, N.J. Tax Court
No. 07557-2007 , October 29, 2014
• The New Jersey Tax Court found that a taxpayer could deduct related party
interest expenses because the Division of Taxation failed to properly apply
the unreasonable exception.
• Taxpayer incurred interest expenses for transactions with its related party.
• The Division asserted that taxpayer’s related party interest expenses did not
qualify for the unreasonableness exception because taxpayer failed to
demonstrate that a tax had been paid on the interest income – essentially
arguing that failure to satisfy the subject to tax exception also barred the
taxpayer from qualifying under the unreasonableness exception.
• The Tax Court held that the Division of Taxation abused its discretion by
failing to take into account authority clearly demonstrating that the sole
criteria under the unreasonable exception is not the payment of tax.
Accordingly, the Tax Court held that it was left with ‘little choice’ to find that
the Division acted unreasonably when it reviewed taxpayer’s interest
addback transactions under the unreasonableness exception.
Current Developments in the Mid-Atlantic
PwC
March 19, 2015
41
Pennsylvania BF&R
Significant Corporate Net Income Decisions
• Act 52 of 2013 requires that the Board of Finance and Revenue (“BF&R”) publish each
decision decided after April 1, 2014.
• Prior to publication of a decision, the BF&R shall edit the decisions to redact certain
information set forth in the Act to be confidential.
• Those CNIT petitions that were granted mainly related to penalty abatement or
correcting favorable calculation errors that were missed on the originally filed returns.
• However, those petitions that were denied involved a number of substantive issues
with common themes:
•
Whether NOL limitation violates the Uniformity Clause?1
1Note:
Decisions state that the BF&R cannot rule on the constitutionality of a Pennsylvania statute, and that
Petitioners did not present sufficient details or evidence supporting their claims that the DOR’s application of
Pennsylvania law to their cases violated the U.S. or Pennsylvania Constitutions.
•
Whether DOR properly disallowed deduction for royalty payments to an affiliated
entity?
•
Whether Petitioners were entitled to special apportionment?
•
Whether Petitioners were entitled to multiform/unrelated income treatment?
Current Developments in the Mid-Atlantic
PwC
March 19, 2015
42
Multistate Tax Commission (“MTC”)
Transfer Pricing Program
• MTC’s aim is to (i) develop recommended uniform state tax policies; and (ii)
encourage compliance & consistency in enforcement through Joint Audit
Program.
• February 2013: Income & Franchise Tax Uniformity Subcommittee drafts
memo addressing states’ authority to reallocate income & deductions, and
suggests uniformity in applying Section 482 power.
• March 2013: MTC decides not to pursue uniformity project.
• May 2013: NJ challenges MTC to consider a proposal to create a dedicated
multistate transfer pricing audit program.
• April 2014: MTC announces aim to create advisory board of state tax directors
to draft model state TP audit program due December 2014 with final design for
submission to Executive Committee / Commission by July 2015.
Current Developments in the Mid-Atlantic
PwC
43
MTC Transfer Pricing Program (cont.)
• Multitude of states offered support to fund the development phase (separate entity &
combined states).
- Mid-Atlantic States involved include D.C. and New Jersey.
- Recently, Pennsylvania joined the MTC audit program.
•
MTC’s Arm’s-Length Adjustment Service Advisory Group (“ALAS”) is expected to
include three types of services:
•
Pre-audit services: analysis and audit selection, training services, and transfer
pricing development.
•
Audit services: including economic services
•
Post-audit services: including legal assistance with litigation, and expert witness
and economic services.
•
Some practitioners believe that the MTC should allow taxpayers to address pricing
issues on the “front end” akin to IRS Advance Pricing and Mutual Agreement
Program.
•
Targeting mid-2015 for start of ALAS program.
Current Developments in the Mid-Atlantic
PwC
March 19, 2015
44
Polling Question 5
Who will be the Philadelphia Eagles’ next off-season acquisition?
a) Michael Crabtree
b) JaMarcus Russell
c) Dan Snyder
d) Brian Dawkins
e) Terrell Owens
f)
Prefer not say
Current Developments in the Mid-Atlantic
PwC
March 19, 2015
45
New York Tax Reform
• Through its recent tax reform, New York effected the following changes to its sales and
use tax provisions:
- Collection requirement for “marketplace providers.”
- Repealed exclusion for property or services purchased by a nonresident when a
person (other than an individual) brings the property or service into the state for
use in the state.
- Single-member LLC and its member now treated as one person.
- Imposition on all payments under a lease at inception for leases of TPP between
related entities.
- Expanded provisions for taxation of transfers, distributions, and contributions of
aircraft and vessels in exchange for any item of TPP.
Current Developments in the Mid-Atlantic
PwC
March 19, 2015
46
Pennsylvania BF&R
Significant Sales/Use Tax Decisions
• In comparison to the petitions for CNIT and CS/FT, 63.5% of the SUT petitions were
granted or granted in part.1
• The majority of the SUT decisions that were granted involved fact-specific application
of the various exemptions:
1
•
Manufacturing exemption
•
Electricity/utilities used directly in manufacturing
•
Wrapping supplies
•
Construction services
•
Nontaxable services
•
Out of state services
Note: This statistic is based only on the 162 SUT decisions sampled.
Current Developments in the Mid-Atlantic
PwC
March 19, 2015
47
Connecticut Governor’s Budget
• As previously discussed, the Governor of Connecticut recently proposed his FY 2016FY 2017 budget.
•
Along with the income tax reforms, the Budget proposes reducing the sales tax rate.
•
Currently, the sales tax rate is 6.35%.
•
The rate would be reduced to 6.20% effective November 1, 2015.
•
The rate would be further reduced to 5.95% effective April 1, 2017.
•
The Budget also proposes to eliminate a $50.00 exemption for clothing that is
currently scheduled to take effect July 1, 2015.
•
The $300 clothing and footwear exemption that normally applies during the annual
“sales tax free week” each August would be lowered to $100, effective this year.
Current Developments in the Mid-Atlantic
PwC
March 19, 2015
48
District of Columbia Emergency Legislation
As previously discussed, FY2015 Budget Support Second Congressional
Review Emergency Act of 2014 enacted December 17, 2014, set to expire April
8, 2015.
•
The Emergency Act also made significant changes to sales tax provisions.
• District Council declined to increase the sales tax rate from 5.75% to 6%, as
recommended by the MTC.
• However, the Emergency Act broadened the general sales tax base to include certain
bottled water consumption, storage of household goods, carpet cleaning.
• Under the Emergency Act, health clubs, tanning studios, car washes, bowling alleys,
and billiard parlors are now also included in the sales tax base.
Current Developments in the Mid-Atlantic
PwC
March 19, 2015
49
Cloud Computing Updates
New York
•
Software as a Service (“SaaS”) is now taxable in New York for in-state users
•
In TSB-A-15(1)(S), an online marketing service was subject to tax on its Customer
Intelligence product for users within the state of New York.
•
The taxpayer provides an online software service allowing clients to perform
sophisticated trend and pattern analysis on feedback collected from customers.
•
The New York Commissioner held that while the CI product has some information
services aspects to it, the primary aspect of the product is the software tools.
•
The accessing of these software tools by customers for consideration constitutes the
license of prewritten computer software, and is taxable for in-state users.
•
However, the basic core offering provided by the taxpayer of capturing, displaying,
sharing, and analyzing online customer feedback was not subject to tax under New
York’s advertising exclusion.
Current Developments in the Mid-Atlantic
PwC
March 19, 2015
50
Cloud Computing Updates
New York (cont.)
Remotely accessed software (still) taxable in New York
•
TB-ST-128, New York State Department of Taxation and Finance (8/5/2014).
•
The New York State Department of Taxation and Finance issued a bulletin
clarifying that remotely accessed software is taxable in New York.
•
The Department ruled that when a purchaser remotely accesses software over the
Internet, the seller transfers possession of the software because the purchaser gains
constructive possession of the software and the right to use or control the software.
•
Accordingly, the sale to a purchaser in New York of a license to remotely access
software is subject to state and local sales tax.
•
The situs of the sale, for purposes of determining the proper local tax rate
jurisdiction, is the location from which the purchaser uses or directs the use of the
software, not the location of the code embodying the software.
Current Developments in the Mid-Atlantic
PwC
March 19, 2015
51
Cloud Computing Updates
Massachusetts
Massachusetts ruled online training programs are nontaxable services
• Massachusetts Letter Ruling 14-4, Massachusetts Department of Revenue
(5/29/2014).
•
The Massachusetts Department of Revenue held that sales of customizable and
interactive online training programs were considered a nontaxable database access
service.
•
The object of the transaction was to access information, and not to obtain software.
•
The online training was exempt even if customized to a specific customer by adding
a corporation's name, branding and colors, etc., or if the training materials were
downloaded or printed by the customer using its own equipment and paper,
whether or not an additional charge is applied.
•
However, training materials provided in tangible form would be subject to tax.
Current Developments in the Mid-Atlantic
PwC
March 19, 2015
52
Polling Question 6
Is software as a Service (“SaaS”) now taxable in New York for in-state
users?
a) Yes
b) No
c) Prefer not to say
Current Developments in the Mid-Atlantic
PwC
March 19, 2015
53
Attributional Nexus
Varying State Approaches to Attributional Nexus
• Vendor Presumption Laws
• Use Tax Reporting Approach
• Customer Protection Issues
• Streamlined Sales Tax Approach
Current Developments in the Mid-Atlantic
PwC
March 19, 2015
54
Recent Attributional Nexus Legislation
State
Bill
Introduced
Maryland
HB 726
2/13/2015
Click-through
Tennessee
SB 603/HB 644
2/10/15
Click-through
New Jersey
AB 3486
6/23/14
Pennsylvania
HB 2103
3/17/14
Current Developments in the Mid-Atlantic
PwC
Further Action
Signed by Governor 6/30/14
Nexus Provisions
Click-through
Notice requirement
March 19, 2015
55
Click-through nexus
WA
MT
ME
ND
MN
OR
VT
ID
WI
SD
MI
NY
WY
RI
UT
CA
MA
CT
PA
IA
NE
NV
NH
IL
NJ
DE
MD
OH
IN
WV
CO
KS
VA
MO
KY
DC
NC
TN
AZ
OK
NM
AR
SC
MS
AK
TX
AL
GA
LA
HI
FL
States that have enacted click-through legislation
Pennsylvania ruling says current law is broad enough to include click-through nexus
Current Developments in the Mid-Atlantic
PwC
March 19, 2015
56
Affiliate nexus
WA
MT
ME
ND
MN
OR
VT
ID
WI
SD
MI
NY
WY
PA
IA
UT
CA
MA
CT
RI
NE
NV
NH
IL
NJ
DE
MD
OH
IN
WV
CO
KS
VA
MO
KY
DC
NC
TN
AZ
OK
NM
SC
AR
MS
AK
TX
AL
GA
LA
HI
FL
States that have enacted affiliate nexus legislation
Current Developments in the Mid-Atlantic
PwC
March 19, 2015
57
Notice and reporting nexus
WA
MT
ME
ND
MN
OR
VT
ID
WI
SD
MI
NY
WY
UT
CA
IL
RI
NJ
DE
MD
OH
IN
WV
CO
KS
MA
CT
PA
IA
NE
NV
NH
VA
MO
KY
DC
NC
TN
AZ
OK
NM
SC
AR
MS
AK
TX
AL
GA
LA
HI
FL
States that have enacted notice and reporting legislation
Current Developments in the Mid-Atlantic
PwC
March 19, 2015
Slide 5858
Multistate Tax Commission Proposal
Draft model sales and use tax notice and reporting statute
• Includes Policy Checklist based on Colorado's retailer notification statute
• At a meeting on 1/31/2011, the subcommittee discussed separating the sales
and use tax notice requirement threshold from the reporting requirement
threshold in the MTC's Colorado-style "Amazon" model statute.
• On a 2/21/2012 teleconference call, the subcommittee approved the model
notice and reporting statute and sent it back to the Executive Committee.
• On 5/12/2012, the executive committee decided to halt work on the notice
and reporting model statute while the Colorado Department of Revenue
appeals a federal judge's ruling that the state's 2010 law is unconstitutional.
• On 3/3/2015, the Supreme Court held that the Federal Injunction Act does
not bar federal review of Colorado’s sales and use tax notice and reporting
law.
• The draft sales and use tax notice and reporting model statute based on the
Colorado law is being held at the MTC Executive Committee level pending an
outcome to the litigation.
Current Developments in the Mid-Atlantic
PwC
March 19, 2015
59
Multistate Tax Commission Proposal (Cont.)
Draft click-through and affiliate sales and use tax nexus model
statute
The Multistate Tax Commission is on track to adopt a click-through and affiliate
sales and use tax nexus model statute for those states pursuing their own plans
to increase use tax collection absent a federal law authorizing states to require
collection by remote sellers.
• The MTC plans to vote on the model statute in July 2015.
• The sales and use tax subcommittee is fine-tuning three different versions of
the model ‘engaged in business’ language to accommodate how a state’s sales
or use tax imposition is structured.
• The MTC's draft click-through nexus language contains an express exclusion
for advertising, while the affiliate nexus draft language would extend to instate activities of a related party using the same or substantially similar
trademarks, service marks, or trade names.
Current Developments in the Mid-Atlantic
PwC
March 19, 2015
60
Recent Developments in Attributional Nexus
New York
New York proposes new marketplace collection responsibilities
• Under a new proposal contained in Governor Cuomo’s budget released on January 21,
2015, New York would require marketplace providers to collect tax on sales by third-party
sellers when they provide the forum for the sale and collect the payments from customers.
Cuomo estimates that the new requirement would raise $59 million a year.
• Under the proposal, online retailers would be required to perform all the duties of a
sales tax vendor, including collecting the tax, filing a tax return and remitting the tax
collected.
• A bill memo accompanying the budget said the proposal “does not expand the rules
concerning sales tax nexus” because “only marketplace providers (Internet retailers) that
have a sufficient presence in New York would be affected by the proposal.”
Current Developments in the Mid-Atlantic
PwC
March 19, 2015
61
Recent Developments in Attributional Nexus
New Jersey
New Jersey enacts click-through legislation
• On June 30, 2014, New Jersey enacted legislation adopting ‘click through’ nexus sales
tax provisions.
• The legislation, which is effective July 1, 2014, creates a rebuttable presumption of
nexus when a seller makes sales of tangible personal property, specified digital products,
or services via a commissioned independent contractor who directly or indirectly refers
potential customers, by a link on an Internet website or otherwise, to the seller.
• For this provision to apply, cumulative gross receipts from such sales must be greater
than $10,000 during the preceding four calendar quarterly periods.
• A.B. 3486, signed by Governor 6/30/2014; See also Notice, New Jersey Division of
Taxation (8/7/2014) and Technical Bulletin TB-76, New Jersey Division of Taxation
(12/12/2014).
Current Developments in the Mid-Atlantic
PwC
March 19, 2015
62
Contacts
Scott Austin
Nicholas Stratis
[email protected]
[email protected]
(267) 330-2567
(267) 330-1739
Jennifer Howard
[email protected]
(267) 330-2164
Current Developments in the Mid-Atlantic
PwC
March 19, 2015
63
Thank you!
This content is for general information purposes only, and should not be used as a substitute
for consultation with professional advisors.
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© 2014 PwC. All rights reserved. In this document, "PwC" refers to PricewaterhouseCoopers
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