23rd Annual Health Sciences Tax Conference

Transcription

1 23rd Annual Health Sciences Tax Conference State tax policy in a supermajority era: no legislative gridlock here (or is there?) December 9, 2013

2 Disclaimer Any US tax advice contained herein was not intended or written to be used, and cannot be used, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions. These slides are for educational purposes only and are not intended, and should not be relied upon, as tax or accounting advice. Page 2

3 Disclaimer EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. Ernst & Young LLP is a clientserving member firm of Ernst & Young Global Limited operating in the US. For more information about our organization, please visit ey.com. This presentation is 2013 Ernst & Young LLP. All rights reserved. No part of this document may be reproduced, transmitted or otherwise distributed in any form or by any means, electronic or mechanical, including by photocopying, facsimile transmission, recording, rekeying, or using any information storage and retrieval system, without written permission from Ernst & Young LLP. Any reproduction, transmission or distribution of this form or any of the material herein is prohibited and is in violation of US and international law. Ernst & Young LLP expressly disclaims any liability in connection with use of this presentation or its contents by any third party. Views expressed in this presentation are not necessarily those of Ernst & Young LLP. Page 3

4 Presenters Troy Deason Director, State Income and Franchise Tax HCA Nashville, TN Brad Withrow Ernst & Young LLP 424 Church St., Suite 1100 Nashville, TN Steven Wlodychak Ernst & Young LLP 1101 New York Avenue, NW Washington, DC Page 4

5 Before we get started a little fun with language(s) EY slide templates have spacer slides (A little secret EY people all know this) EY uses Latin phrases to demonstrate how characters appear on the PowerPoint pages. But what hidden meaning is there in these words? What do they really say? We found out Page 5

6 Text slide no bullets Arial 24 point. Lorem ipsum dolor sit amet, consectetuer adipiscing elit. Sed eros pede, gravida non, malesuada id, consequat id, urna. Integer vehicula pharetra nisl. Maecenas vel diam. Praesent eget massa non leo fringilla tristique. Sed scelerisque ullamcorper urna. Quisque adipiscing fringilla arcu. Sed pharetra mi vitae nisl posuere vestibulum. Maecenas arcu elit, iaculis in, mollis vel, blandit at, velit. Phasellus at purus. Aenean non lorem ac lectus mollis vehicula. Page 6

7 Text slide no bullets Google Translator Arial 24 point. We will be available, please contact us. But the United States with the foot, not pregnant, Ohio that results from that, urn. Integer immigration emergency vehicles. Or more in diameter. This need not be a mass migration tank. But chocolate corporate goals. Home each customer. But the workers have a vital role, my porch. Enhanced the airport, in the brakes, soft or, look at the most exciting, outdoor. But pure professionalism. I really do not try and get soft vehicles. Page 7

8 Agenda 2013 update: state tax legislation Federal legislation affecting state taxes State taxes on international operations Judicial developments Page 8

9 2013 update: state tax legislation Page 9

10 State tax legislation State tax legislation enacted over the last year 2012 elections brought significant change at the state level. Unlike gridlock in Washington, an unprecedented number of states have one party rule. Governor s office, Senate and House all controlled by same party Political control enabled the states to effect significant legislative changes during 2013 that were absent in Washington. Even in states without such control (e.g., New Jersey and New Mexico (Gov = GOP, Legislature = Dem), New York (Gov = Dem, Senate = Divided (GOP)), government leaders found ways to get things done. Page 10

11 Post-2012 (and 2013) election: who controls state governments? Republicans Democrats Split Rhode Island May 2013, Gov. Chafee switched registration to Democrat (from Ind.) WA MT ND MN VT ME OR ID WY SD WI MI NY NH CA NV UT CO NE* KS IA MO IL IN OH KY WV PA VA CT NJ DE MA RI MD AK Source: Multistate Associates AZ HI NM TX OK TN AR AL GA MS LA * Nebraska has a non-partisan state legislature NC SC FL Nov update Virginia GOP lost Governor s office (McAuliffe elected), but continued divided control house of legislature. New Jersey Gov. Christie re-elected, but Dems continued control of both houses of legislature. Page 11

12 Scorecard of 2013 state indirect tax law changes: the results Eliminate tax Increase rates Decrease rates Repeal multistate tax compact Corporate: Dead LA, MS, NE, NM, NC, SC, TX, VA Personal: Dead LA, NE, NM, NC Corporate: Enacted CT (extend surcharge); Dead MT Personal: Enacted DE, MN; Dead MA Corporate: Enacted AK, IN (bank franchise tax); NM, NC, ND; Dead MD, MN, NE, PA, RI; Vetoed MO, MT Personal: Enacted IN, KS, NC, ND, OH, OK, WI; Dead KY, NE; Vetoed MO, MT Enacted DC, MN, OR, SD, UT Combined reporting Enacted NM (limited); Dead CT, KY, MD, PA Allocation and apportionment Adopt a single sales factor: Enacted NM (limited); Dead MA, NC Adopt market-based sourcing: Enacted MA, PA; Dead KY, OR; Pending NJ (regulation) Adopt a throwback rule: Dead CT, KY, OR Adopt a throwout rule: Enacted MA Adopt Finnigan approach: Enacted MN Economic nexus Dead AL, MS Tax base Miscellaneous Related party add-back: Enacted KY, MN, NY, OR, PA; Dead MS, NC NOL carryforward: Enacted ID, NE (extend); Dead AK (extend) NOL carryback: Dead NY (eliminate) Delay FAS 109 deduction for combined filers: Enacted MA Codify economic substance: Dead MN Eliminate certain benefits for foreign operating companies: Enacted MN Repeal preferential taxation of utility corporations: Enacted MA Disclosure of tax information: Dead IL, ME, OR Page 12

13 Scorecard of 2013 state indirect tax law changes: the results Repeal tax Sales/use tax: Dead RI Sales/use tax rates Sales/use tax nexus expansion Sales/use tax base expansion Sales/use exemptions Credits and incentives Property tax Controversy Increase: Enacted KS, LA, ME, NV, SD, VA Dead HI, LA, NV, SD Decrease: Enacted DC; Dead MA, OH, TX, VA Click through and/or affiliate nexus: Enacted IA, KS, ME, MN, MO, PR, WV; Dead CO, FL, HI, IN, MS, OK, UT; Vetoed NM, OH; Pending MA, MI, PA Notification requirement: Enacted KY Require remote retailers to collect if federal law enacted: Enacted CO, MN, RI Tax services significant expansion: Dead KY, LA, MN, NM, NC, OH Tax services limited expansion: Enacted NC Eliminate exemptions: Dead AZ, LA, NE Tax software: Enacted MA; Dead MN Manufacturing exemption adopted/expanded: Enacted CA, FL, WI Data center exemptions adopted/expanded: Enacted AZ, MN, OH, TX, WY Medical/health care exemptions adopted/expanded: Enacted AL, MN, MS Enterprise zone credit program adopt/modify: Enacted CA, CO, WI Jobs credits adopt/modify: Enacted AR, CA, CT, IA, MO, NM, NY, TN, WI R&D credits adopt/modify: Enacted DE, HI, IN, MD, NH, NC, ND, TX Historic tax preservation credit adopt/modify: Enacted CT, LA, MD, MN, NY, RI Film credit adopt/modify: Enacted AK, MD, NM, PA, RI, WV Repeal/sunset of credits: Enacted NC, OK Eliminate personal property tax on business equipment: Enacted ID Reduce commercial and industrial property tax rates: Enacted IA Increase business personal property tax exemption: Enacted UT Amnesty program: Enacted AR (franchise tax), CT, LA, City of Los Angeles; Dead MA, NY; Vetoed MO Independent tax court: Dead AL, CO, FL, TN, TX Page 13

14 State tax legislation Pennsylvania Pennsylvania (HB465, July 9, 2013 (effective January 1, 2014)) Market-based sourcing of receipts for sales factor apportionment purposes delivered in this state Will affect apportionment for service industries and those reliant on sale of intangible property Raise net operating loss annual limitation (will affect value of deferred tax assets) Current law: greater of 20% of apportioned PA income or $3m January 1, 2014: greater of 25% of apportioned PA income or $4m January 1, 2015: greater of 30% of apportioned PA income or $5m Page 14

15 State tax legislation Pennsylvania Pennsylvania (HB465, July 9, 2013 (effective January 1, 2014)) Add back of intangible expenses and costs paid to related parties after December 31, 2014 Royalties, licenses, or fees paid for the acquisition, use, maintenance, management, ownership, sale of patents, patent applications, trade names, service marks, copyrights... 1 Exceptions: Credit for tax paid by related party on its intangible income Conduit Treaty Business purpose the adjustment will not apply to a transaction that did not have as the principal purpose the avoidance of tax and was done at arm s-length rates and terms. 1 Section 19, 2013 Pa. Laws 52. Page 15

16 State tax legislation Massachusetts Massachusetts (HB 3535 July 24, 2013, retroactive to January 1, 2013) Public focused on the extension of MA sales tax to computer installation services: Provision was repealed retroactively on September 27, However, important income tax changes enacted, too Sales factor for services moves to market-based sourcing Historically services sourced based on costs of performance (i.e., sourced to the state where the greatest costs incurred to perform the services occurred) New law effective January 1, 2013 market-based sourcing Services to MA, if service is delivered to MA Throwout to MA, if not taxable elsewhere Intangible property to MA, if used in MA Page 16

17 State tax legislation Massachusetts Massachusetts (HB 3538 July 12, 2013) FAS 109 deduction delayed (again) Special MA deduction to allow for costs of converting from separate return reporting to combined reporting Taxpayers would have been eligible for 1/7th deduction annually for tax costs of eliminating FAS 109 provisions Start date pushed to 2015 Page 17

18 State tax legislation California California eliminates Enterprise Zone Program (EZ Program) (AB 93, SB 90, July 11, 2013) Clarifying legislation in AB 106 (Sept. 26, 2013) No new EZ employment tax credits for employees hired after December 31, 2013 AB 106 clarified that vouchers for those employees must be submitted and issued prior to January 1, 2015 Can continue to earn EZ credits for up to five years for employees already hired through the program Existing EZ credits subject to 10-year carryforward Prior to enactment of the legislation, had an unlimited carryforward Page 18

19 State tax legislation Texas Texas franchise tax changes (HB500 June 14, 2013) Franchise tax based on taxable margin Is it an income tax (FAS 109) or something else (FAS 5)? Changes: Rate reduction 2.5% in 2014, 2.5% in 2015 Depends on revenue estimates From 1.0% (2013), to 0.975% (2014) to 0.95% (2015) (for most taxpayers) (lower rates for wholesalers) Costs of goods sold (COGS) deduction expanded to other industries: pipeline entities, movie theaters and ticket resellers Special exclusion of flow-through funds from total revenue: Pharmacy networks, transporters of barite aggregates, petroleum landman services, waterway transport, truckers, vaccines Page 19

20 State tax legislation Texas Texas franchise tax changes Proposals affecting the health sciences industries that were not adopted. Credit (not just deduction) for uncompensated care Enact 100% exclusion for Medicaid receipts from margins base (as opposed to current 50% exclusion) Page 20

21 State tax legislation Texas Texas franchise tax changes Could this year s changes mean the beginning of the end for the Texas margins tax? Erosion of political support Failure to meet revenue projections Biennium Comptroller s franchise tax biennial projection Actual franchise tax revenue Difference $11.9 billion $8.7 billion ($3.2 billion) $8.9 billion $7.8 billion ($1.1 billion) Source: Comptroller of Public Accounts, Texas Conservative Coalition Research Institute report Winners and losers What would replace it? Current budget surpluses (due to oil tax revenues) Can they continue? Legislature doesn t meet again for two years Page 21

22 Federal legislation affecting state taxes Page 22

23 Federal legislation: Uniform remote sellers use tax collection standards S. 743/H.R. 684 (Marketplace Fairness Act) (MPFA) Would allow states to require sales/use tax collection by remote retailers (e.g., Internet websites) that lack physical presence with the state if certain criteria are met Passed Senate May 6, 2013 (69-27) Political division? Not Democrat vs Republican, but sales tax states vs non-sales tax states In Montana, it [the Marketplace Fairness Act] forces our small businesses to play tax collector for other states with absolutely no benefit to them. Sen. Baucus (D-MT) (April 23, 2013) (Head of Senate tax committee) Referred to House Judiciary Committee/Subcommittee on Regulatory Reform, Commercial and Antitrust Law Rep. Goodlatte (R-VA), chairman of House Judiciary Committee, issues seven Basic Principles to govern debate (September 18, 2013) Page 23

24 Federal legislation: Uniform remote sellers use tax collection standards S. 743/H.R. 684 (Marketplace Fairness Act) Remote retailers that lack physical presence in a state would be required to collect/remit use tax, if the state: Is a Streamlined Sales Tax (SSUTA) full-member state or Adopts and implements minimum simplification requirements set forth by the MPFA Provides a small seller exception (less than $1m of sales excepted from compliance) Page 24

25 Federal legislation: Uniform remote sellers use tax collection standards S. 743/H.R. 684 (Marketplace Fairness Act) States would be required to either: 1. Adopt and maintain conformity with the comprehensive SSUTA rules, definitions and policies Or 2. Implement minimum simplification measures: Provide free compliance software to taxpayers Provide that for all taxing jurisdictions within the state there will be a single: (1) entity responsible for state/local tax administration; (2) audit for remote sellers; and (3) sales/use tax return for use by remote sellers Provide a single, uniform sales/use tax base among all state/local taxing jurisdictions in the state Provide remote sellers and certified service providers (CSP) with 90 days notice of a state or local rate change Page 25

26 Federal legislation: Uniform remote sellers use tax collection standards S. 743/H.R. 684 (Marketplace Fairness Act) While the main focus of the MPFA is directed at remote retailers, the minimum simplification option is likely to erode state conformity with the SSUTA, which has been negotiated for years, and provides: Uniformly defined terms Uniform sourcing Uniform exemption administration Uniform certificates and returns Bundled transactions limits on caps/thresholds Tax holidays Rounding Refund requirements Controversy resolution options Compliance Review and Interpretations Committee (CRIC) and Governing Board (GB) sanctions Page 26

27 Federal legislation: Uniform remote sellers use tax collection standards S. 743/H.R. 684 (Marketplace Fairness Act) If the MPFA is passed, the following SSUTA benefits specific to health care and health sciences industries are threatened with abandonment: Uniformly defined terms/exemption administration (Prosthetics, drugs, prescription, durable medical equipment (DME), mobility enhancing equipment (MEE), dialysis, enteral feeding, insulin, medical oxygen, overthe-counter (OTC) drugs, Medicare, etc.) SSUTA health care item list (product-specific classifications) SSUTA health care item list addendum Bundled transactions (50% rule drugs, DME, MEE, OTC drugs, medical supplies) (e.g., kits, packs, trays ) Uniform exemption certificates No good-faith requirement for vendors Limits potential audit exposure of sellers Flexibility to providers on entity/use-based exemptions (Medicare/Medicaid) Facilitates Health Insurance Portability and Accountability Act compliance Page 27

28 Federal legislation: Other bills H.R (Business Activity Tax Simplification Act) (BATSA) Introduced Aug. 2, 2013 (Rep. Sensenbrenner (R-WI)) Limits the ability of a state to impose a business activity tax only if the person has a physical presence in the state De minimis physical presence would be defined to be greater than 15 days in the state Update and extend P.L to all sales (not just goods) and all taxes (not just net income taxes) Same bill as proposed since 2001 At least the fifth iteration of the legislation Page 28

29 Federal legislation: Other bills H.R (Mobile Workforce State Income Tax Simplification Act of 2013) (Mobile Workforce) Prohibits states from imposing income tax on employee compensation unless: Employee is a resident of the state Employee is present and performing employment duties for more than 30 days in a calendar year (except for certain professional athletes, entertainers and public figures) Introduced by Rep. Coble (R-NC) March 13, 2013 Referred to House Judiciary Subcommittee on Regulatory Reform, Commercial and Antitrust Law on April 15, 2013, where it sits Same as legislation which passed House in 2012 (but died in Senate) Page 29

30 Federal legislation: Other bills S (Digital Goods and Services Tax Fairness Act) Would prohibit state and local governments from imposing multiple or discriminatory taxes on the sale or use of digital goods or digital services delivered or transferred electronically to a customer H.R (Permanent Internet Tax Freedom Act) and S (Internet Tax Freedom Forever Act) Would make permanent the moratorium on taxes on Internet access and multiple and discriminatory taxes on electronic commerce Potential for packaging these bills into one single, comprehensive bill? Response to US Sup. Ct. plea in Quill (1992) Pending appeals in Amazon.com and Overstock.com to US Sup. Ct. of NY Ct. of Appeals upholding of NY remote seller law Page 30

31 State taxes on international operations Page 31

32 Refresher on federal taxation of foreign subsidiaries general deferral US parent corporation 100% owned Foreign subsidiary corporation US generally does not tax foreign earnings of a foreign corporate subsidiary until a dividend is paid to a US shareholder. Foreign corporations generally not includable in federal consolidated return IRC 1504(b)(6) (not an includable corporation ) US taxes only US source income (IRC 881 and 882) Result defer payment of any residual US tax Policy help US companies compete abroad Page 32

33 Refresher on federal taxation dividend repatriations US parent corporation $ $0$ Dividend Foreign subsidiary corporation US shareholder includes dividend from foreign sub in gross income IRC 243(a) dividends from foreign companies not eligible for dividend received deduction (DRD) To prevent double taxation, may claim foreign tax credits: 902 credit for sub s foreign income taxes 901 credit for foreign withholding taxes Report 78 gross-up income equal to 902 credit Prevents double tax benefit for sub s foreign income taxes Page 33

34 Refresher on federal taxation Subpart F (IRC ) US shareholder Deemed dividend of Subpart F income Controlled foreign corporation Passive investments Subpart F (IRC ) prevents income shifting by denying deferral to certain tainted foreign earnings of a subsidiary controlled foreign corporation (CFC). CFC US shareholders own > 50% of foreign corporation Tainted Subpart F Income passive income interest, royalties, dividends IRC 954 (foreign base company income (primarily)) US shareholder recognizes deemed dividend to be equal to pro rata share of CFC s Subpart F income (IRC 951). Federal tax people don t like calling it a deemed dividend. Page 34

35 State conformity to IRC treatment of international issues Subpart F income Federal treatment: income of a foreign subsidiary that is treated as a deemed dividend accelerated dividend Foreign dividends not eligible for DRD States don t conform: no dividend unless an actual distribution Tax policy point: US Constitution Foreign Commerce clause restricts the states from taxing distributions from foreign subsidiaries differently than from domestic subsidiaries Kraft v. Iowa, 505 U.S. 71 (1992) Foreign taxes Federal treatment: foreign tax credits offset other country taxes Avoid double taxation of the same income States don t follow (and don t need) foreign tax credits why? Tax policy point: double taxation of extraterritorial income protected through division of the tax base by apportionment and allocation Page 35

36 Example Overview: US Parent contributes income-producing assets to CFC. CFC generates portfolio income. Contribution of incomeproducing assets US Parent CFC Subpart F inclusion US federal considerations: Section 367 on outbound contribution if built-in gain CFC s income likely subject to current inclusion under Subpart F CFC local country considerations: CFC typically domiciled in low-tax jurisdiction or tax base eroded through hybrid instruments State income tax considerations: CFC excluded from certain unitary returns Subpart F income eligible for full or partial DRD in many states Page 36

37 Judicial developments Page 37

38 Property and sales taxes embedded intangibles/software California Four big cases: Cardinal Health 301, Inc. v. County of Orange, 167 Cal. App. 4th 219 (Cal. App. 4th Dist. Sept. 2008) (property tax) Nortel Networks, Inc. v. State Board of Equalization, 191 Cal. App. 4th 1259 (Cal. App. 2nd Dist. (Jan. 2011)) rev. denied 2011 Cal. LEXIS 4767 (Cal. April 27, 2011) (sales tax) Elk Hills Power, LLC v. State Board of Equalization, 57 Cal. 4th 593 (August 12, 2013) (property tax) Lucent Technologies, Inc. et al v. State Board of Equalization, Nos. BC402036, BC and BC (Cal. Superior Ct., Los Angeles County (September 27, 2013)) (sales tax) Similar question addressed: Are embedded software or intangible values includable in the tax base? Courts conclude No Page 38

39 Property and sales taxes embedded intangibles/software California Cardinal Health (2008) property tax Bundled application software (part of MedStations system) cannot be assessed for property tax purposes. MedStations included hardware and software in one bundled application. Cardinal Health acquired MedStations equipment. California law: Cal. Rev. & Tax Code 995 and 995.2: Application software, as distinct from basic operational software, is not to be valued for purposes of property taxation. Cal. Code Regs. tit. 18, 152: Taxpayers may demonstrate that a portion of the value of a computer represents nontaxable application software, despite the fact that application software came bundled inside the computer when the customer bought or leased it. Page 39

40 Property and sales taxes embedded intangibles/software California Nortel Networks (2011) sales tax Software licensed to operate switching equipment is exempt from sales tax under the Technology Transfer Agreement statute, because it is copyrighted, contains a patented process and enables the licensee to copy the software and make and sell products embodying the patents and copyright. Cal. Rev. & Tax Code 6011, 6012 California Supreme Court denied review SBOE, News Release No H (May 27, 2011): This change does not affect the taxability of off-the-shelf retail sales of canned software. Application to health sciences? California sales tax refunds to the extent of value attributed to embedded software in medical equipment and machinery Page 40

41 Property and sales taxes embedded intangibles/software California Elk Hills Power (2013) property tax (mixed message) Property tax assessors must deduct the value of intangible assets in determining value under a replacement cost method. Under the income approach method, not all intangibles have a quantifiable fair value that must be deducted from the unit value. Power plant s emission reduction credits (ERCs) that were separately acquired cannot be added to the replacement cost of the plant as a sitespecific adjustment, but their value does not have to be deducted in applying the income approach, as the taxpayer did not articulate a separate stream of income to the ERCs. Ruling makes it ever more important for a taxpayer to: Specifically identify all of its intangible assets Quantify their value, as well as their associated income streams For health sciences values of environmental credits = certificates of need(?) Page 41

42 Property and sales taxes embedded intangibles/software California Lucent Technologies, Inc. (2013) sales tax Trial court expressly affirms Nortel on taxpayer s summary judgment motion No triable issues of fact Software subject to technology transfer agreement (TTA), as component of delivery of telecommunications switching systems is exempt from California sales tax Page 42

43 Software exemptions Many states exempt some forms of software as an intangible. Each state s rules are different must review each state s definitions and criteria. Examples (property tax) (similar rules in sales tax): California Basic operational programs are subject to tax. Basic operational program means a computer program that is fundamental and necessary to the functioning of a computer. Processing or application programs, developed solely for the solution of an individual or operational problem, are not taxable. Florida Computer software is assessed, only to the extent of the value of the medium on which the information is stored or transmitted. Computer software does not include embedded software that resides permanently in the internal memory of a computer, and that is not removable without terminating the operation of the computer or equipment. Page 43

44 Multistate Tax Commission apportionment election Judicial developments California Gillette Gillette v. Franchise Tax Board (Cal. App. Ct. (October 2, 2012)) Taxpayers were entitled to make the Multistate Tax Compact (the MTC) evenly weighted three factor apportionment election in lieu of the California statutorily mandated three factor double weighted sales factor apportionment formula. MTC is a valid compact that California as a signatory state is bound by until the state withdraws from the MTC law change mandating use of the double-weighted sales factor did not repeal the MTC election. Page 44

45 Multistate Tax Commission apportionment election California Gillette Appeal Court ruling reverses superior court in full and restarts process in trial court Appeal Court specifically did not address timeliness of election (e.g., make on original or amended return?) California Supreme Court accepted review of Franchise Tax Board s appeal Taxpayer s reply briefs submitted October 23, 2013 anticipate hearing in later this year or early 2014 Ruling by spring 2014(?) Page 45

46 Multistate Tax Commission apportionment election California Gillette California legislature repealed MTC election (2012 S.B enacted June 27, 2012) Repeal may be invalid under California Constitution (e.g., bill did not receive requisite vote of both houses) Doctrine of election Legislature expresses intent that election had to be made on originally filed return questions as to validity of this Doctrine Until California Supreme Court decides, question is validity of three-factor election uncertainty? Page 46

47 Multistate Tax Commission apportionment election Michigan IBM IBM v. Dept. of Treas. (Michigan Ct. of App. November 20, 2012) (unpublished) Same general issues as California Gillette case Question: can taxpayers use MTC three-factor formula? Ct. of Appeals affirms Ct. of Claims (August 2, 2011) Taxpayers can t elect MTC three-factor formula (180 degrees from California). Taxpayers must use single sales factor formula required by the Michigan Business Tax Act (MBTA). The alternative apportionment provision in the MBTA did not conflict with, nor was it negated by, the MTC. Because there is no way to harmonize the MTC and the MBTA s single-factor sales formula, as a matter of statutory construction the later-enacted statute (MBTA) controls. Page 47

48 Multistate Tax Commission apportionment election Michigan IBM Michigan Supreme Court grants petition to review July 3, 2013 Orders that appellate decision remain unpublished Thus, binding only on IBM Question: will Court overturn Ct. of Appeals Ruling? Two other cases behind it: Anheuser-Busch, Inc. Ct. of Claims rules for taxpayer can use MTC election Michigan Supreme Court denied taxpayer claim to leapfrog over Ct. of Appeals directly to Michigan Supreme Court Lorillard Tobacco Company (Ct. of Appeals) Page 48

49 Multistate Tax Commission apportionment election Michigan IBM Contrast with outcome in California in the Gillette decision Seemingly contradictory decisions May be as simple as IBM not making Compact contract argument that was very determinative in the California ruling New attorneys for IBM Michigan Supreme Court appeal are same ones that argued California Gillette. May also be because California has very specific rules in its constitution on the enactment of legislation by reference to specific provisions which might not apply in Michigan While conclusions are diametrically opposed to each other, they may be harmonized considering the unique rules of each state. Page 49

50 Multistate Tax Commission apportionment election Michigan IBM Other MTC cases? Oregon Texas Administrative appeals taxpayer position rejected Comptroller s office has denied claims for refund Page 50

51 Multistate Tax Commission apportionment election Multistate Tax Commission Membership Source: Multistate Tax Commission Alabama Alaska Arkansas Colorado DC Hawaii Idaho Compact members Kansas Texas Michigan Utah Missouri Washington Montana New Mexico North Dakota Oregon Sovereignty members Georgia Kentucky Louisiana Minnesota New Jersey West Virginia Arizona California Connecticut Florida Illinois Indiana Iowa Associate and project members Maine Maryland Massachusetts Mississippi Nebraska New Hampshire New York North Carolina Ohio Oklahoma Pennsylvania Rhode Island South Carolina South Dakota Tennessee Vermont Wisconsin Wyoming Page 51

52 Equifax and burden of proof Mississippi Equifax (Miss. Sup. Ct. 24 June 2013): Mississippi, by Tax Commission regulation, uses cost of performance (COP) to source sales factor. Service business (credit reporting) derives $30m from Mississippi customers, but performs no services in state. Even if it did, proportionate test would still source revenue to state with largest share of cost of performance Similar to UDITPA Sec. 18 adopted by regulation, not statute Taxpayer files return, reports income but no factors in Mississippi No property No payroll Critically, no sales (all sourced to Georgia under COP) Thus no Mississippi tax Page 52

53 Equifax and burden of proof Mississippi Equifax (Miss. Sup. Ct. 24 June 2013): Holding: Overturning Court of Appeals, MS Sup. Ct. reinstates Chancery Court decision and holds that Tax Commission s assessment is presumed correct and taxpayer always has burden to prove that the assessment is incorrect. Even in case of alternative apportionment, where burden should shift to the party moving to deviate from the statutory method Historically party moving for alternative method (i.e., taxpayer or the taxing authority) has to prove: Statutory method unreasonably apportions income to state Party seeking alternative apportionment must show that its method is better than statutory method Taxpayer petitions for reconsideration Page 53

54 Questions? Page 54