State income and franchise tax quarterly update

Transcription

1 First quarter 2015 State income tax developments State income and franchise tax quarterly update In this issue Key developments To our readers: The following provides a summary of the significant legislative, administrative and judicial actions that affected state and local income/ franchise taxes during the first quarter of Page 2 Page 3 Page 3 Massachusetts Department of Revenue adopts market-based sourcing regulations New York ruling provides guidance on sourcing online travel reservation facilitation and advertising receipts District of Columbia enacts rate changes, singles sales factor apportionment with market-based sourcing Other noteworthy developments Connect with us Follow us on Twitter Page 3 Page 4 Page 5 Page 5 Page 6 Page 7 Legislative developments in Arizona Legislative developments in Arkansas, District of Columbia, Georgia, Idaho, Iowa, Maine, Massachusetts, Minnesota, Nebraska, North Carolina, South Carolina and South Dakota Legislative developments in Virginia and West Virginia Judicial developments in Maryland, Massachusetts, Mississippi, Missouri and Oregon Administrative developments in California, Indiana and New Mexico Administrative developments in New York, Pennsylvania, South Carolina and Virginia Developments to watch Page 7 Page 8 Developments to watch in Alabama, Connecticut, Maryland, Minnesota and New York Developments to watch in Pennsylvania, Rhode Island, Tennessee and Texas

2 Key developments Massachusetts Department of Revenue adopts market-based sourcing regulations Massachusetts: On 2 January 2015, the Massachusetts Department of Revenue (DOR) issued final market-based sales factor sourcing regulations (839 CMR ) for sourcing receipts from sales other than sales of tangible personal property. The regulations for airlines (830 CMR ), motor carriers (830 CMR ) and courier and package delivery services (830 CMR ) are now subsumed into the general apportionment regulation under 830 CMR (9)(d)(4). Industry specific apportionment rules for pipeline companies (830 CMR ), the electric industry (830 CMR ) and the telecommunications industry (830 CMR ), as well as the DOR s corporate nexus regulation (830 CMR ) will remain in effect and have been amended to be consistent with the amended general apportionment regulation. The new rules apply to tax years beginning on or after 1 January In terms of overall structure surrounding the sourcing of sales other than sales of tangible personal property, the amended regulations are as follows: Provide a rule of determination for assignment of such sales, depending on the taxpayer s business and/or type of sales. Allow the taxpayer to use a reasonable approximation methodology to the extent sales cannot be assigned under the rule of determination, as provided in the regulation. Provide that a taxpayer must in good faith and with reasonable effort attempt to comply with any provided rule of determination. If the taxpayer cannot comply with the rule of determination, it then must apply a rule of approximation. In some cases, a suggested rule of approximation is provided and should be used. When a rule is not provided, some other reasonable method should be used. Provide that if neither the rule of determination or of reasonable approximation may be used, the sales must be excluded (i.e., thrown out ) from the sales factor. Provide a separate throwout rule for sales other than sales of tangible personal property when such sales are made into a state or foreign country in which the taxpayer is not taxable. Clarify that the throwout rule does not apply to mutual fund services, irrespective of whether the entity providing such services qualifies as a mutual fund service corporation. As set forth in the regulations, once a reasonable approximation method is used on an original return, neither the taxpayer (through an amended return) nor the DOR Commissioner (through an audit adjustment) may change the method of reasonable approximation, subject to certain exceptions (e.g., factual or computational error by either party, failure to follow appropriate hierarchy of rules, taxpayer s method is not reasonable, taxpayer does not have sufficient records to support its approximation). Both the taxpayer and the Commissioner have the ability to change the taxpayer s method of assignment on a prospective basis. Further, the regulation indicates that approximation by extrapolation (e.g., applying known geographic distribution percentages of sales to sales with unknown geographic distributions) is generally the preferred method of reasonable approximation when possible and reasonable. Ernst & Young LLP s insights Effective for tax years beginning on or after 1 January 2014, Mass. Gen. Laws. c. 63, 38(f) provides, in part, in the case of sales, other than sales of tangible personal property, if the taxpayer is not taxable in a state to which a sale is assigned, or if the state or states to which such sales should be assigned cannot be determined or reasonably approximated, such sale shall be excluded from the numerator and denominator of the sales factor. Given that Massachusetts adopts the Finnigan rule, sales sourced to states where any member of a Massachusetts combined group (not just the selling member) is subject to tax should not be thrown out of the factor. It should be noted that the throwback rule (which applies to sales of tangible personal property) statutorily provides that taxpayers will be presumed to be taxable in foreign jurisdictions in which they make sales. Conversely, the throwout rule (which applies to sales of other than tangible personal property) does not presume taxability in foreign jurisdictions. 2 State income and franchise tax quarterly update

3 New York ruling provides guidance on sourcing online travel reservation facilitation and advertising receipts In In re Expedia, Inc., 1 the New York Division of Tax Appeals (DTA) held that an out-of-state, internet-based travel company s receipts from travel reservations are derived from the performance of services and, therefore, are properly sourced outside the state because all of the incomeproducing activity was performed outside New York. In reaching this conclusion, the DTA noted that, by allocating the travel company s transactions based on the site of its customers computers, the New York State Division of Taxation and Finance applied a customer sourcing approach that was not in effect until 1 January 2015, and runs contrary to the statutory scheme in place during the years at issue. Ernst & Young LLP s insights For tax years beginning on or after 1 January 2015, New York state tax reform has completely reversed the state s position on sales factor sourcing for revenues. The ruling, however, provides guidance on the New York sales factor treatment of internet service providers, as well as for other service companies, in evaluating their apportionment to New York for pre-reform tax years. While the DTA ruling is significant, as of the date of this summary, it is uncertain whether the Division will appeal and what the results of such an appeal may be. District of Columbia enacts rate changes, singles sales factor apportionment with market-based sourcing The District of Columbia (District) FY2015 Budget Bill (L ; A20-424) (Budget) reached the mandatory Congressional 30 in-session day review period and became final law on 26 February Effective 1 January 2015, the District adopts adopt a single sales factor apportionment formula with market-based sourcing for service revenues for corporate and unincorporated business franchise tax purposes, and it amends the definition of sales for franchise tax purposes and unincorporated business for unincorporated business franchise tax purposes. Also effective on 1 January 2015, the franchise tax rate applicable to both corporations and unincorporated businesses decreased to 9.4% (from 9.975%). For taxable years beginning after 31 December 2015, additional rate reductions (i.e., to 9.2%, then 9.0%, then 8.75%, then 8.5%, and finally 8.25%) will be implemented on a prioritized basis 2 as set forth in D.C. Code (c) in years that revenue thresholds are met. Thus, before the business franchise tax rates are reduced to 9.2%, two individual income tax measures will become effective; before the rates are reduced to 9.0%, an individual income tax measure will become effective; before the rates are reduced to 8.75%, five individual income tax and estate tax measures will become effective; etc. Ernst & Young LLP s insights The District s tax reform law makes significant and important changes to its income tax laws that will likely impact every taxpayer in the District. Aside from the initial rate reduction from 9.975% to 9.4% on 1 January 2015, the timing of the additional rate reductions will depend on whether there is available funding to pay for the reduction and if the franchise tax rate reduction is next on the priority list of tax reform and relief measures under the implementing legislation. Thus, it s very important for District taxpayers to regularly monitor revenue developments over the next several years as they affect the tax relief measures. Moreover, the enacted laws are somewhat ambiguous as to precisely when certain provisions take effect (i.e., market based sourcing, the change in the definition of sales) and the matter of the missing rate in the applicable rates under the franchise tax provisions, that will need to be addressed in a technical corrections bill. While the effective date of the market-based sourcing provisions has been made clear by emergency legislation (effective for 90 days) and temporary legislation (effective for 225 days), it will still need to be addressed in a bill that will make the change permanent, all of which is still subject to review by the U.S. Congress. Based on informal conversations we ve had with an official of the District Office of Taxation and Revenue, they are aware of these problems and have pointed them out to the District Council as needing corrective action. Other noteworthy developments Legislative Arizona: Legislation (SB 1471), enacted 12 March 2015, establishes a tax amnesty program that will run 1 September 2015, through 31 October The tax amnesty program applies to all taxes administered by the Arizona Department State income and franchise tax quarterly update 3

4 of Revenue, including the state s corporate income tax. Eligible taxpayers that participate in, and comply with the terms of, the amnesty program, will have otherwise applicable civil penalties and interest waived or abated. Arkansas: Legislation (HB 1427), enacted 20 March 2015, updates statutory references to certain Internal Revenue Code (IRC) provisions in effect on 1 January Updated references include sections 108 and 1017 (discharge of indebtedness); 167 and 168(a)-(j) (depreciation); and Subchapters M (dealing with speical business organizations and S (small business corporations). These changes are retroactively effective for tax years beginning on or after 1 January District of Columbia: Final law (L ; A ; B ), enacted 11 March 2015, reduces the tax rate on capital gains from the sale or exchange of a Qualified High Technology Company (QHTC) investment to 3% (from the rate which generally applies to corporations and unincorporated businesses [currently 9.4%] if: (1) the investment was made after 2 December 2014; (2) the investment was held by the investor for at least 24 continuous months; (3) at the time of the investment, the stock was not publicly traded; and (4) the investment is common or preferred stock of the QHTC. The lower rate applies in tax years beginning after Georgia: Law (HB 292), enacted 6 March 2015, updates Georgia s date of conformity to the IRC as amended and in effect on or before 1 January 2015, effective for taxable years beginning on or after 1 January The state continues to decouple from bonus depreciation, the IRC section 199 production deduction and various other provisions. The amount allowed as an expense limitation under IRC section 179(b) is increased to $500,000 (from $250,000) for tax years beginning in Idaho: New law (HB 77), enacted 23 February 2015, updates Idaho s date of conformity to the IRC to 1 January As part of its conformity to the IRC, the Idaho Tax Commission said that it conforms to the new federal repair regulations but does not require documentation of that change, other than what is required for federal purposes. In addition, Idaho conforms to the IRC section 179 expense provisions but not bonus depreciation provisions. 3 Effective 1 January 2015, HB 85 (enacted 11 March 2015) amends Idaho s holding period requirement relating to capital gains for qualifying property that was distributed by a pass-through entity to a person who is an owner, member or partner at the time of the distribution. Specifically, the holding period includes the amount of time the S corporation or entity treated as a partnership held the property, regardless of whether it was a liquidating distribution. Iowa: Legislation (SF 126), enacted 17 February 2015, updates Iowa s conformity date to the IRC to 1 January 2015, but decouples from bonus depreciation. This change is retroactively applicable to 1 January Maine: On 12 February 2015, legislation (LD 138) was enacted to update Maine s IRC conformity date to 31 December 2014, but decouples from federal bonus depreciation deduction provisions. Massachusetts: Legislation (HB 52), enacted 13 February 2015, establishes a tax amnesty program that applies to the corporate excise tax. The Massachusetts Department of Revenue (DOR) announced that the program will run 16 March 2015, through 15 May For eligible taxpayers that participate in and comply with the terms of the amnesty program, the DOR will waive otherwise applicable penalties. Minnesota: Legislation (HF 6), enacted 24 January 2015, updates the state s date of conformity to the IRC to 31 December The incorporated federal changes apply retroactively at the same time as the change is effective for federal purposes. Nebraska: LB 171 updates the state s date of conformity to the IRC to the date of enactment, 26 February North Carolina: Legislation (SB 20), enacted 31 March 2015, updates the state s date of conformity to the IRC to 1 January The state decouples from federal bonus depreciation for property placed in service in 2014 and increased expensing provisions (for 2014, the federal IRC section 179 dollar and investment limitations were increased to $500,000 and $2 million, but for North Carolina purposes, the dollar and investment limitations were set at $25,000 and $200,000). The addition required for bonus deprecation is 85% of the amount deducted on the federal return and 85% of the difference between the increased expense deduction using federal and state limitations. South Carolina: Legislation (SB 397), enacted 27 March 2015, updates the state s date of conformity to the IRC to 31 December South Dakota: For purposes of income tax imposed on financial corporations, legislation (SB 19), enacted 17 February 2015, updates South Dakota s conformity date 4 State income and franchise tax quarterly update

5 with the IRC to that in effect on 1 January Virginia: On 10 March 2015, legislation (SB 1142) was enacted to require corporate taxpayers with an enterprise data center operation to use a single sales factor apportionment formula beginning 1 July For taxable years beginning on or after 1 July 2016 through 30 June 2017, these taxpayers are required to use a more heavily weighted sales factor formula (i.e., property factor, payroll factor and a quadruple-weighted sales factor with a denominator of six). These provisions only apply if the taxpayer has entered into a memorandum of understanding with the Virginia Economic Development Partnership Authority on or after 1 July 2015, to make a new capital investment of at least $150 million in the commonwealth. SB 1044, enacted 16 February 2015, updates Virginia s date of conformity to the IRC to 31 December West Virginia: Law (HB 2115), enacted 25 February 2015, updates the state s conformity to the IRC in effect after 31 December 2013, but before 1 January Judicial Maryland: In Conagra Brands, Inc., 4 the Maryland Tax Court (the Court) held that an out-of-state intangible holding company with no presence in Maryland (e.g., no property or employees in Maryland, did not conduct business in the state) has nexus with the state because it lacked economic substance separate from its parent, which was doing business in the state. In reaching this conclusion, the Court reasoned that the holding company s income is produced from its parent s business in Maryland. This connection is sufficient to establish nexus for the holding company to justify taxation. The Court also upheld the Comptroller of Treasury s use of a blended apportionment factor, which was derived from the income tax returns of the holding company s related entities filing in Maryland, to allocate the company s income to Maryland. Lastly, the Court waived interest and penalties, ruling that the taxpayer had a reasonable basis for challenging the law because the state of the law was not clear at the time of the assessments. Massachusetts: In its opinion in The First Marblehead Corporation, 5 the Massachusetts Supreme Judicial Court (SJC) ruled that the Commissioner of the Massachusetts Department of Revenue properly treated the loans of an out-of-state holding company as being located wholly in Massachusetts and, therefore, included in the numerator of its property factor. It did so, because it found that the company failed to rebut a statutory presumption that the interest on the loans should be sourced to its commercial domicile, which was Massachusetts. Mississippi: In AT&T Corp., 6 the Mississippi Chancery Court (the Court) held unconstitutional in violation of the Commerce Clause statutory law (Miss. Code Ann. Section (4)(i)), which allows a recipient of an intercompany dividend to exclude the dividend from the calculation of its gross income only if the distributing corporation is doing business and filing income tax returns in Mississippi in the year of the distribution. In terms of a remedy, the Court declined to retroactively rescind the statute and disallow the tax benefits to all taxpayers because the statute of limitations for assessing tax for the years at issue ( ) had expired, thus making such remedy neither permissible nor practicable. Instead, the Court reasoned that the only appropriate remedy is to strike the offensive limitations and allow the taxpayer to claim the deduction. Missouri: In reversing an Administrative Hearing Commission ruling, the Missouri Supreme Court (the Court) in Southwestern Bell Telephone Co. 7 held that a national telephone company was engaged in business in Missouri and, therefore, subject to the state s franchise tax through the activities of its wholly owned limited partnership. The company was a foreign corporation that had been engaged in business and paying franchise taxes in Missouri and underwent a restructuring whereby it created a wholly owned limited partnership to own and operate assets used in its business. The Court held that the franchise tax is imposed upon the property and assets a corporation employs in the state, regardless of where the assets are located. It is therefore immaterial whether a foreign corporation engaged in business in Missouri does so directly or indirectly through a wholly owned limited partnership. Oregon: In Powerex Corp., 8 the Oregon Supreme Court (the Court) held that a Canadian-based company s sales of natural gas that was shipped through an Oregon hub are excluded from the company s Oregon sales factor, because the ultimate destination of the gas is outside the state. The Court also held that for purposes of the allocation and apportionment provision, electricity is tangible personal property because [i]t is perceptible to the senses... The Court, however, remanded the case back to the Tax Court for a determination of whether the company delivered or shipped the electricity it sold to purchasers in Oregon or in other states. In Rent-A-Center, Inc., 9 the Oregon Tax Court (the Court) rejected the Department of Revenue s retroactive application State income and franchise tax quarterly update 5

6 of a 2006 rule change defining what is a single trade or business for purposes of determining which entities are part of a unitary group, because it was inconsistent with statutory law in effect for the tax periods as issue. Under Oregon Revised Statute section as adopted in 1984, a single trade or business exists if there is a sharing or exchange of value as demonstrated by: (1) centralized management or a common executive force; (2) centralized administrative services or functions resulting in economies of scale; and (3) flow of goods, capital resources or services demonstrating functional integration. The Court indicated that the 1984 statute and legislative history provides for a conjunctive reading of the three factors when determining whether an entity should be included in the unitary business. Administrative California: In the March 2015 issue of Taxnews, the Franchise Tax Board (FTB) announced that California follows the federal repair regulations, effective for taxable years beginning on or after 1 January In regard to the effect of IRS approval to a change in accounting methods, the FTB explained that an accounting method change approved for federal purposes will apply for California purposes if California law conforms to or is substantially similar to the underlying law that is being applied. The common issue for the repair regulations is a potential difference between the federal and California depreciable basis, useful life or method of depreciation since California decouples to a significant degree with many accelerated depreciation rules of the IRC. The FTB said that to the extent California law follows the federal provision for which the federal approval was granted, the federal approval for a change in accounting methods will still apply for state purposes even though there may be a federal/california difference. Indiana: In Letter of Findings No (25 February 2015), the Indiana Department of Revenue (the Department) required members of a federal consolidated group that manufacture, distribute and sell consumer goods file a combined return because the companies are in a unitary relationship and the originally filed returns did not fairly reflect the companies adjusted gross income. In reaching this conclusion, the Department rejected a federal transfer pricing study, stating that a unitary relationship existed because there was common management of the different entities because the parent company made all decisions related to the consumer goods, including product, packaging, pricing and advertising. Moreover, the parent company was responsible for all product liability claims, provided overall product strategy and exercised legal oversight of all affiliates. In Letter of Findings No (25 February 2015), the Department determined that an out-of-state company s income from licensing its intellectual property and services to franchisees in Indiana constitutes the company s principal source of income and, therefore, the company is required to source the income to Indiana for apportionment purposes. In Letter of Findings No (29 January 2015), the Department required a grain processor corporation that provides ingredients to the food, beverage, brewing and pharmaceutical industries to include royalty income derived from its licensing of intangible property (e.g., trademarks, trade names, patents and proprietary knowhow) to wholly owned foreign subsidiaries because the transfer of the intangible property on a royalty-free basis distorted the corporation s total income. Specifically, the Department determined the tax-free contribution of the sublicense distorted the corporation s income because there was a mismatch of expenses incurred in the development, maintenance and enhancement of the intangibles being deducted, while the corresponding income generated by such expenses came in the form of nontaxable dividends. In Letter of Finding (28 January 2015), the Department determined that an out-of-state company that provides online educational services is required to pay income tax on money received from Indiana students who took online courses because the money was received for providing services to Indiana customers. New Mexico: On 24 March 2015, an Administrative Law Judge (ALJ), on a motion to reconsider, withdrew its 29 December 2014 decision in Covenant Transportation Group, Inc., in which it held that a company filing corporate income tax returns as a combined unitary group was allowed to claim a net operating loss (NOL) generated in previous years by its subsidiaries when they filed on a separate entity basis. In its new order, the ALJ reversed his prior ruling and held that the company could not claim the NOLs generated in previous years by its subsidiaries when they filed on a separate entity basis. In reaching this conclusion, the ALJ agreed with the Department of Revenue (DOR) that New Mexico does not adopt IRC section 172(a) s treatment of NOL deductions from another taxpayer s separate entity return. Instead, the state law requires taxpayers to add back the amount of NOL deductions claimed on the federal return to derive New Mexico base income. Since N.M. Stat. section 6 State income and franchise tax quarterly update

7 7-2A-2(H), which defines the extent of a NOL carryover deduction, does not included the deduction at issue, the DOR s disallowance of the deduction was proper. 10 New York: In its opinion in In the Matter of the Petition of TD Holdings II, 11 the New York Division of Tax Appeals ruled that a taxpayer was not required to apply its net operating loss deduction to lower its entire net income in a year when that income was already below the level triggering the imposition of an alternative non-income tax base. Note: the Department of Taxation and Finance has appealed this ruling. Pennsylvania: On 17 February 2015, the Pennsylvania Department of Revenue issued Informational Notice Bank Shares Tax to clarify the receipts factor apportionment provisions of the Pennsylvania Bank Shares Tax. The Bank Shares Tax requires institutions to include receipts from trading assets/activities and investment assets/activities in the numerator of the receipts factor by choosing one of two methods (Method 1 and Method 2). The informational notice states Method 1 provides only for the inclusion of receipts from trading assets/activities in the receipts factor numerator. Therefore, if a taxpayer has receipts from investment assets/activities, Method 2 must be used to determine the receipts from both trading assets/ activities and investment assets/activities to be included in the numerator of the receipts fraction. South Carolina: In Dish DBS Corp., 12 an administrative law judge (ALJ) was asked to determine whether, for sales factor apportionment purposes, South Carolina is a costof-performance state or a market-based state. In denying cross motions for summary judgment from the taxpayer and the South Carolina Department of Revenue (the Department), the ALJ concluded that South Carolina does not appear to be a strict cost-of-performance state, but also that a genuine issue of material fact exists as to whether the Department s undefined method based on income-producing activity was correct. While the ruling in the Dish case does not provide broad certainty on the sourcing of services, it does provide precedent stipulating that South Carolina is neither a cost-of-performance nor a market-sourcing state for sales factor sourcing purposes and, further, that the determination of the income-producing activity test demands a stringent factual analysis. Virginia: In Ruling 15-5 (8 January 2015), the Tax Commissioner determined that a company providing marketing, issuer and technology solution services to financial corporations will be considered a financial corporation required to use a single sales factor apportionment formula if it derives more than 70% of its gross income from fees, commissions and other compensation for the provision of these services. Developments to watch Alabama: Proposed bill (HB 142) would implement a key provision of Governor Robert Bentley s plan to fill a funding gap by adopting mandatory combined reporting. Connecticut: Provisions of Governor Malloy s budget proposal would eliminate the $250 biennial business entity tax, extend the corporate tax surcharge at its current rate (20% of a corporation s Connecticut tax liability), cap the amount of NOLs that can be used at 50% and reduce the cap on tax credits for corporate tax purposes to 35% in 2015, 45% in 2016 and 60% in 2017 and thereafter. Maryland: It is anticipated that the U.S. Supreme Court (Court) will issue its opinion in Comptroller v. Wynne sometime before the close of the Court s current session at the end of June In this case, the Court was asked whether Maryland resident shareholders of an S Corporation engaged in a multistate business must be provided an other state tax credit against the county portion of the state income tax under the dormant Commerce Clause. 13 Minnesota: On 19 March 2015, the Minnesota Tax Court (the Court) heard arguments in Kimberly-Clark Corp. 14 At issue in this case is whether an out-of-state corporate taxpayer is allowed to make an election under the Multistate Tax Compact (Compact), which for the period at issue Minnesota adopted, to apportion its Minnesota taxable income using the Compact s equally weighted three factor formula instead of the state mandated formula. In 1987, Minnesota repealed Sections III (election provision) and IV (apportionment factor) of the Compact, and in 2013, repealed the Compact in its entirety. The Court has 90 days to issue its decision. New York: The New York legislature has approved and sent Governor Cuomo the FY budget bill (A B/S B) (the 2015 NYS Tax Bill), which includes provisions amending New York State s (NYS) corporate tax reform legislation enacted in 2014 (2014 NYS Reform Bill), and another bill (S A/A A), which includes provisions conforming New York City s (NYC) corporate tax State income and franchise tax quarterly update 7

8 laws, in substantial part, to the 2014 NYS tax reform as amended by the 2015 NYS Tax Bill (the NYC Conformity Bill). Most of the corporate tax changes in the 2015 NYS/NYC Bills are retroactively effective to 1 January The 2015 NYS Tax Bill makes significant changes to three important definitional terms included in the 2014 NYS Reform Bill: (1) investment capital (narrows the definition), (2) investment income (eliminates the requirement to reduce investment income by hedging losses and caps investment income to not more than 8% of entire net income for all taxpayers), and (3) qualified financial instrument (QFIs) (broadens its applicability). In addition, the 2015 NYS Tax Bill makes technical corrections to various provisions, including those related to the 40% safe harbor election for interest attribution, pre and post reform NOLs, the definition of loan secured by real property, the location of treasury function, marked to market net gains, Financial Services Investment Tax Credit, New York qualified manufactures, the fixed dollar minimum for short period returns and apportionment for vessels and qualified air freight forwarders. The NYC Conformity Bill enacts a new subchapter to codify corporate tax reform for New York City s separate general corporation tax. Despite general conformity to the New York state provisions, the NYC General Corporation Tax and its Banking Corporation Tax are not repealed. Furthermore, no changes were made to the NYC tax law as it applies to S corporations and thus, the NYC corporate and banking corporation tax laws continue to apply to Subchapter S taxpayers just as if they were organized as C corporations for federal income tax purposes. Moreover, partnerships and limited liability companies treated as partnerships continue to be subject to the NYC Unincorporated Business Tax. The NYC corporate tax provisions that align with 2014 Reform Bill and the 2015 NYS Tax Bill include the following: Mandatory combined reporting Substantial modifications to the definitions and treatment of investment income and capital Creation of a new category of nontaxable income titled other exempt income Forty percent safe harbor revocable election for interest expenses attributed to investment income and other exempt income New customer sourcing provisions for receipts sourced to NYC and an 8% election for receipts from QFIs Changes to the computation of pre and post reform NOLs Elimination of the current subsidiary capital regime Increased fixed dollar minimum tax amounts. While a majority of the NYC tax reform provisions contain conforming language to the 2014 NYS Reform Bill, there are several significant deviations from the 2014 NYS Reform Bill and the 2015 NYS Tax Bill. The NYC Conformity Bill does not include new economic nexus provisions for NYC, adopts a higher business income tax rate for financial corporations than for other corporations, includes an election to keep certain apportionment factor weighting after 2017, increases the maximum capital based tax and includes a rate reduction for qualified NYC manufacturing corporations but not the zero percent rate available for manufacturers under the state s tax reform provisions. Pennsylvania: Governor Tom Wolf s FY 2016 budget includes significant corporate income tax changes. Most notably, the corporate net income tax rate would be reduced as follows: 9.99% to 5.99% in 2016, then to 5.49% in 2017 and, finally, 4.99% in 2018; the phase-out of the capital stock and foreign franchise taxes would continue; and mandatory unitary combined reporting would be adopted. Rhode Island: The Rhode Island Division of Taxation is considering a regulation relating to the state s combined reporting provisions, which took effect 1 January Tennessee: Governor Bill Haslam s FY tax related budget proposal (introduced in HB 644 and SB 603), would adopt economic and bright-line nexus standards, adopt market-based sourcing and expand the state s intercompany add-back provisions. Separate bills that would adopt a single sales factor apportionment formula have been proposed. Texas: The Senate approved bills that would reduce the franchise tax rate (SB 7) and increase the franchise tax exemption from total revenue of $1 million or less to total revenue of $4 million or less (SB 8). Franchise tax relief is supported by both chambers of the state legislature and the governor. 8 State income and franchise tax quarterly update

9 Endnotes 1 In re Expedia, Inc., DTA Nos and (N.Y. Div. Tax App. 5 February 2015). 2 These reductions, along with tax relief provisions for individuals and estates, will be implemented on a prioritized basis as set forth in D.C. Code section (c). 3 See Idaho Tax Comm., Conformity to Federal Internal Revenue Code (23 February 2015). 4 Conagra Brands, Inc. v. Comptroller of Treasury, No. 09-IN- OO-0150 (Md. Tax Ct. 24 February 2015). 5 The First Marblehead Corporation v. Commissioner of Revenue, 470 Mass. 497 (Mass. Sup. Jud. Ct. 28 January 2015). 6 AT&T Corp. v. Mississippi Department of Revenue, No. G (Miss. Ch. Ct., 1st Jud. Dist., 20 March 2015). 7 Southwestern Bell Telephone Co. v. Director of Revenue, No. SC93900 (Mo. Sup. Ct. 13 January 2015). 8 Powerex Corp. v. Oregon Department of Revenue, No. SC S (Ore. Sup. Ct. 26 March 2015). 9 Department of Revenue v. Rent-A-Center, Inc., No. TC 5224 (Or. Tax Ct. 26 January 2015). 10 In the Matter of the Protest of Covenant Transportation Group, Inc., Order No (N.M. Dept. of Rev. and Taxn. 24 March 2015). 11 In the Matter of TD Holdings II, Inc., DTA No (NY Div. of Tax App. 22 January 2015). 12 Dish DBS Corp, f/k/a/ EchoStar DBS Corp., and Affiliates v. South Carolina Department of Revenue, No. 14-ALJ CC (S.C. Admin. Law Ct. 10 February 2015). 13 Maryland Comptroller of the Treasury v. Wynne, 63 A.3d 453 (Md. Ct. App. 28 January 2013), cert granted, Dkt. No US Sup. Ct. 27 May 2014). 14 Kimberly-Clark Corp. et al. v. Commissioner of Revenue, Dkt. No (arguments 19 March 2015). For additional information, please contact one of the following Ernst & Young LLP professionals: National Tax Chris Gunder National Director State Income Tax Financial Services Office Michael Memmolo Central Region Tim Kimmel Canada Kathryn Toal Northeast Region Scott Shreve Southeast Region Sid Silhan Southwest Region David Jackson West Region Todd Carper EY Assurance Tax Transactions Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. 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. For more information about our organization, please visit ey.com. Ernst & Young LLP is a client-serving member firm of Ernst & Young Global Limited operating in the US Ernst & Young LLP. All Rights Reserved SCORE No. YY3512 ED None This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax or other professional advice. Please refer to your advisors for specific advice. ey.com