TWIST-Q 2017 Summary of developments

Transcription

1 TWIST-Q 2017 Summary of developments This checklist includes the developments we reported in Quarters 1, 2, and 3, as well as new developments for Quarter 4. New developments from Quarter 4 are in bold typeface. Please note that certain Quarter 4 items in bold are dated earlier. These items were released after our Quarter 3 checklist or were first made publicly available during the Quarter 4. Note that this checklist contains state specific developments and that if federal tax reform is enacted before the end of 2017, there will be state consequences associated with the federal reforms. Our article has more information on the state implications of federal tax reform. Also, please see the last page of the checklist for a comprehensive corporate income tax rate chart. Rate changes Impact The District s Chief Financial Officer certified that revenue collections were sufficient to trigger a reduction in the corporate franchise and unincorporated business tax rate from 9.0 percent to 8.25 percent effective for tax years beginning after December 31, Letter to the Mayor (Feb. 28, 2017). DC The corporate income tax rate is increased to 7.0 percent effective July 1, Senate Bill 9 (veto overridden July 6, 2017). IL Because the state experienced the requisite personal income growth, the Michigan Business Tax (MBT) annual surcharge expired effective January 1, Thus, the surcharge is no longer imposed on the remaining taxpayers who continue to file and pay the MBT, rather than the corporate income tax. Michigan Dep t of Treasury Update (August 2017). MI 1 TWIST-Q 2017 Summary of developments

2 Rate changes Impact The Business Profits Tax rate is reduced to 7.7 percent effective for tax periods ending on or after December 31, 2019 and then again to 7.5 percent for tax periods ending on or after December 31, The Business Enterprise Tax rate is likewise reduced to 0.06 percent for tax periods ending on or after December 31, 2019 and then again to 0.50 percent for tax periods ending on or after December 31, House Bill 517 (signed June 28, 2017). NH For tax years beginning on or after January 1, 2018 and before January 1, 2019, the New York MTA surcharge rate has increased from 28.3 to 28.6 percent. TSB-M-17(4)C (New York Dep t of Taxation and Finance Dec. 4, 2017). NY The 3.0 percent corporate income tax rate that applies for tax years beginning on or after January 1, 2017 will be further reduced to 2.5 percent effective for tax years beginning on or after January 1, Senate Bill 257 (veto overridden June 28, 2017). NC 2 TWIST-Q 2017 Summary of developments

3 Nexus and Public Law Impact The Franchise Tax Board (FTB) will follow the Swart holding in situations with the same facts. To the extent taxpayers believe their situation has the same facts as in Swart, taxpayers should take these facts into consideration when determining if they have a return filing obligation and/or should file a claim for refund. Notice (Cal. FTB Feb. 28, 2017). CA A taxpayer was not doing business in California merely by virtue of passively holding a 0.2 percent ownership interest in a managermanaged California LLC. Significantly, the taxpayer had no right to act on behalf of or to bind the LLC and had no ability to participate in the management and control of the LLC. Swart Enterprises, Inc. v. California FTB (Cal. Ct. App. Jan. 12, 2017). CA A Wyoming rental company was doing business in California for the tax year at issue because its corporate secretary lived in California and engaged in bookkeeping, answering phone calls, sending financial information to the company s accountant, and making deposits in the company s California bank account. Matter of the Appeal of Quad Mobile Trackmasters (Cal. Bd. Equal. Jan. 21, 2015). CA The taxpayer s president (a California resident) presided over the annual stockholder and board of directors meetings and its secretary-treasurer (a California resident with a California home office) was responsible for all of the financial affairs of the company. There was no evidence that these activities, which were not within the scope of Public Law protection, occurred outside of California. As such, the taxpayer was doing business in California. Matter of the Appeal of Commercial Financial Services, Inc. (Cal. Bd. Equal. Jan. 21, 2015). CA 3 TWIST-Q 2017 Summary of developments

4 Nexus and Public Law Impact For tax years prior to Colorado adopting an economic nexus regulation, a taxpayer had corporate income tax nexus with Colorado by virtue of deriving royalties from instate sources. Target Brands, Inc. v. Colo. Dep t of Revenue (Colo. Dist. Ct. Jan. 27, 2017). CO An offshore investment company that holds certain shareholder or board of directors meetings in the Commonwealth will not be treated as doing business in Massachusetts for corporation excise purposes. However, an offshore investment company that maintains its principal corporate records and books of account, or maintains a place of business, or executes contracts in Massachusetts may be subject to Massachusetts tax jurisdiction. If such an offshore investment company, in addition to having no effectively connected income (ECI) under federal law, also has no U.S.-source non-eci, it would have no federal gross income. Thus, it would be subject only to the minimum excise. Technical Information Release 17-2 (Mass. Dep t of Revenue Feb. 16, 2017). MA A company did not qualify for Public Law protection because its employees regularly reported back to the company on competitor activities occurring in stores when the employees were present. The employees also assisted with quality control and inventory issues by pulling moldy product from shelves, providing restocking services, and providing the taxpayer with information on when customers returned defective products to the stores. Blue Buffalo Company, Ltd. v. Comptroller (Md. Tax Ct. Aug. 30, 2017). MD 4 TWIST-Q 2017 Summary of developments

5 Nexus and Public Law Impact A foreign corporate limited partner had Corporation Business Tax nexus by virtue of owning limited partnership interests in two partnerships operating in New Jersey. Despite language in the partnership agreement indicating that the limited partner was not involved in the partnerships business, the business activities and operations between the various entities within the overall group were far from sharp and distinct and in fact were completely blurred. Preserve II, Inc. v. Director, Division of Taxation (N.J. Tax Ct. Oct. 4, 2017). NJ Two pharmaceutical companies were not protected from corporate income tax by virtue of Public Law in part because of their own activities (through ownership of an LLC) and in part because of activities attributed to them from another affiliate that sponsored clinical research at New Mexico hospitals. Matter of the Protest of Aventis Pharmaceuticals Inc. (N.M. Dep t of Revenue May 19, 2017). NM The activities (filling out warranty forms and submitting such forms to the taxpayer for a payment or credit related to defective tires) of a separate corporation that were performed on behalf of an out-of-state taxpayer resulted in the taxpayer losing P.L protection. Cheng Shin Rubber USA, Inc. v. Oregon Dep t. of Rev. (Ore. Tax Ct. Mar. 31, 2017). OR The activities of certain bank taxpayers created substantial economic nexus in Oregon when the banks repeatedly extended credit, loaned money, pursued collection, and earned revenue in Oregon. Capital One Auto Finance, Inc. v. Dep t of Revenue (Ore. Tax Ct. Dec. 23, 2016). OR 5 TWIST-Q 2017 Summary of developments

6 Nexus and Public Law Impact A taxpayer has substantial nexus with Tennessee and is subject to Tennessee franchise and excise taxes if it provides intrastate transportation services within Tennessee, makes deliveries of goods into Tennessee that originate in another state, or transports goods from Tennessee for delivery into another state. A taxpayer that travels through Tennessee on one or more trips that originate and terminate outside Tennessee and that makes no pickups or deliveries or conducts no other business activity in Tennessee is not doing business in Tennessee. Revenue Ruling #17-08 (Tenn. Dep t of Revenue June 21, 2017). TN Tax Base Impact Losses generated in tax years when members of an Alabama affiliated group filed separate returns could be used to offset income generated by other group members in years when an Alabama consolidated return was filed. The ability to share the losses was dependent on the taxpayers being members of an Alabama affiliated group, not having elected to file a consolidated return. Dep t of Revenue v. Coca-Cola Refreshments, USA (Ala. Ct. Civ. App. Sept. 8, 2017). AL Under Alabama law, a financial institution subject to Alabama's financial institution excise tax is allowed to deduct dividends received from a corporation organized under Alabama law. A financial institution taxpayer was entitled to deduct dividends received from a REIT organized under Alabama law because a REIT is also a corporation. Ameris Bank f/k/a Southland Bank v. Ala. Dep t. Rev. (Ala. Tax Trib. Feb. 9, 2017). AL 6 TWIST-Q 2017 Summary of developments

7 Tax Base Impact For Alaska purposes, a domestic corporation with 80 percent or more foreign business activity is comparable in all material ways to a foreign corporation with 80 percent or more foreign business activity. Thus, dividends from a domestic corporation with 80 percent or more foreign activity are treated in the same manner as foreign dividends and are subject to an 80 percent dividends-received deduction. In re Costco Wholesale Corporation (Office of Admin. Hearings, June 12, 2017). AK Notwithstanding any provision of the Internal Revenue Code or any rule or regulation adopted pursuant to the Code, a change in the organizational structure of a corporation, including an S corporation, or a limited liability company, a partnership or any other entity, however organized, into another organizational structure is not a taxable event for Arizona income tax purposes if there is no change among the owners, their ownership interests or the assets of the organization. House Bill 2438 (signed Mar. 31, 2017). AZ The California FTB addressed the application of IRC sections to California-apportioning taxpayers. The IRC section 382 limitation is applied in California on a pre-apportionment basis. However, net unrealized built-in gains, net unrealized built-in losses, recognized built-in gains, and recognized built-in losses would be determined on a post-apportionment basis. Tech. Advice Memo (Cal. FTB Apr. 6, 2017). CA The period over which the FAS 109 deduction can be taken has been extended from seven years to thirty years. In addition, the first year the deduction will be allowed is 2021 (rather than 2018). In sum, the onethirtieth of the deduction will be allowed for a 30-year period commencing with the combined group s income year that begins in Senate Bill 1502 (signed Nov. 3, 2017) and Senate Bill 1503 (signed Nov. 21, 2017). CT 7 TWIST-Q 2017 Summary of developments

8 Tax Base Impact The fact that no actual interest was paid or principal payments were made on intercompany loans did not mean the loans lacked a business purpose. Interest expense and interest income accruals, for purposes of financial reporting, are treated as if actual cash has been exchanged. Because the interest rate on the loans was arm slength under IRC section 482, the Department s argument that the rate was too high was rejected. E.I. DuPont De Nemours and Co. v. Indiana Dep t of Revenue (Ind. Tax Ct. July 11, 2017). IN Nothing in Indiana law prohibited the Department from making adjustments to NOLs incurred and first reported on returns outside the statute of limitations (i.e., in closed tax years) when those NOLs were utilized in open tax years. E.I. DuPont De Nemours and Co. v. Indiana Dep t of Revenue (Ind. Tax Ct. July 11, 2017). IN The taxpayer could not take an Indianaonly deduction for R&D expenses when it had opted to claim a credit for those expenses on its federal return. E.I. DuPont De Nemours and Co. v. Indiana Dep t of Revenue (Ind. Tax Ct. July 11, 2017). IN Effective for tax years ending on or after December 31, 2017, in computing base income, corporate, individual, partnership, and trust and estate taxpayers must add back an amount equal to the deduction allowed under IRC section 199. Senate Bill 9 (veto overridden July 6, 2017). IL Iowa subsidiaries were not entitled to deduct certain amortization expenses paid by their parent although they had guaranteed the underlying debts and provided the funds to make the payments. Even if internal allocation of the amortization to the subsidiaries constituted payment of these expenses, the amortization expenses were not reasonable and necessary business expenses of the subsidiaries. Romantix Holdings, Inc. et al. v. Iowa Dep t of Revenue (Iowa Ct. App. May 3, 2017). IA 8 TWIST-Q 2017 Summary of developments

9 Tax Base Impact Massachusetts does not adopt the federal election to allow a taxpayer to take a disaster loss into account in the tax year immediately preceding the tax year in which the disaster occurred. The Massachusetts tax code expressly disallows deductions for "losses sustained in other taxable years and provides an exception only for net operating loss deductions. Massachusetts Electric Co. v. Commissioner of Revenue (Mass. App. Aug. 15, 2017). MA A taxpayer was not a staffing company and could therefore not deduct compensation for personnel supplied to customers. Only staffing companies are allowed this deduction in calculating the modified gross receipts tax base under the Michigan Business Tax. HTC Global Services Inc. v. Michigan Dep t of Treasury (Mich. Tax Trib. Mar. 17, 2017). MI The Minnesota Department of Revenue will acquiesce to the Minnesota Tax Court's decision in Sinclair v. Commissioner of Revenue and the IRC section 382 limitation is not be required to be apportioned for Minnesota corporate income tax purposes. Revenue Notice #17-09 (Nov. 6, 2017). MN Despite the Commissioner s longstanding policy to the contrary, the IRC section 382 limitation is not required to be apportioned for Minnesota tax purposes. Sinclair Broadcast Group, Inc. v. Commissioner of Revenue (Minn. Tax Ct. Aug. 11, 2017). MN Effective January 1, 2018 and for property placed in service on or after that date, the limit on deducting expenses under IRC section 179 is increased from $100,000 to $500,000. House Bill 517 (signed June 28, 2017). NH 9 TWIST-Q 2017 Summary of developments

10 Tax Base Impact A foreign taxpayer s federal taxable income reported on Line 29 of the federal form 1120-F was its starting point in computing New Jersey entire net income. The Division could not force the taxpayer to add back worldwide income absent a specific adjustment. Infosys Limited of India, Inc. v. Director, Division of Taxation (N.J. Tax Ct. Nov. 28, 2017). NJ Because the legislature intended to assess tax on actual economic gains, as opposed to artificial gains, a taxpayer was allowed to increase its federal adjusted basis by the cumulative amount of depreciation deductions for which it received no New Jersey benefit. Toyota Motor Credit Corp. v. Director, Division of Taxation (N.J. Super. Ct. App. Div. Oct. 23, 2017). NJ Royalty payments paid by a taxpayer to its parent were for the use of intangible property, rather than the purchase of tangible personal property for resale. However, requiring the taxpayer to add back the royalties paid to its parent would be unreasonable when both parties had substance and the transaction was substantially equivalent to an unrelated party transaction. BMC Software, Inc. v. Division of Taxation (N.J. Tax Ct. May 24, 2017). NJ The New Jersey Division of Taxation has issued a Technical Bulletin discussing what taxes are required to be added back in determining New Jersey Corporation Business Tax. The Bulletin provides a list of taxes that, in the Division s view, are not required to be added back in calculating CBT, such as the West Virginia B&O Tax and the Alabama Privilege Tax. The Bulletin then provides a non-exclusive list of taxes required to be added back, which includes the Texas Margin Tax and the Washington B&O Tax. TB-80 (N.J. Div. of Taxation Mar. 15, 2017). NJ 10 TWIST-Q 2017 Summary of developments

11 Tax Base Impact Effective for tax years beginning on or after January 1, 2017, taxpayers are required to add back the amount of any deduction claimed in computing taxable income for all expenses and costs directly or indirectly paid, accrued or incurred to a captive real estate investment trust (as defined). Senate Bill 391 (signed Apr. 6, 2017). NM During the tax years at issue ( ), no provision of New York law specifically authorized a deduction from entire net income for premiums paid to a captive insurance company affiliate that were not deductible for federal income tax purposes. Matter of Stewart s Shops Corp. (N.Y. Tax App. Trib. July 27, 2017). NY Market discount income was not interest upon U.S. obligations that could be deducted for North Carolina tax purposes. Although the market discount income was treated as interest under IRC section 1276, that section was not referenced in the North Carolina modifications statute and therefore the term interest had to be defined in accordance with its plain meaning periodic payments received by the holder of a bond. The Fidelity Bank v. N.C. Dep t of Revenue (N.C. Aug. 18, 2017). NC In determining whether a nominal debt instrument creates deductible interest allowable under N.C. Gen. Stat B, the Secretary will not apply the covered debt instrument rules contained in the regulations promulgated under IRC section 385. Senate Bill 628 (signed Aug. 11, 2017). NC 11 TWIST-Q 2017 Summary of developments

12 Tax Base Impact Effective for tax years beginning on or after January 1, 2016, a taxpayer must: (1) add back all interest expense paid or accrued to a related member to the extent it exceeds the interest received from a related member included in the taxpayer s gross income; and (2) deduct qualified interest. Effective for tax years beginning on or after January 1, 2017, the deduction for qualified interest is limited to the taxpayer s proportionate share of interest paid or accrued to a person who is not a related member during the same taxable year (unless certain exceptions apply). Senate Bill 628 (signed Aug. 11, 2017). NC A 100 percent deduction is allowed for dividends paid by an insurer excluded from the Oregon consolidated group to its affiliate. This change applies to open tax years. Senate Bill 153 (signed June 14, 2017). OR The flat-dollar cap on the NOL, currently at $5 million, will not be available for taxable years beginning in 2017 and thereafter. The NOL limitation of 30 percent of taxable income will continue to be effective for taxable years beginning in Corporation Tax Bulletin (Nov. 16, 2017). PA If any part of the net operating loss deduction is declared to be unconstitutional by the Pennsylvania Supreme Court, the Department is required to publish a notice of the decision in the Pennsylvania Bulletin. Upon publication of that notice, the net loss deduction carryover for tax years beginning after December 31, 2017 is 35 percent of taxable income. For tax years beginning after December 31, 2018 and thereafter the limitation is 40 percent of taxable income. House Bill 542 (signed Oct. 30, 2017). PA 12 TWIST-Q 2017 Summary of developments

13 Tax Base Impact The flat-dollar net loss deduction limitation in effect for the 2007 tax year at issue violated the Uniformity Clause of the Pennsylvania Constitution; however, the appropriate remedy was to sever the flat-dollar limitation but keep intact the percentage of income limitation. Nextel Communications, Inc. v. Pennsylvania (Pa. Oct. 18, 2017). PA Amounts subsequently paid to subcontractors for labor expenses could be excluded from total revenue because the taxpayer was obligated under its contracts with its subcontractors to pay for the labor. The Comptroller s position that the taxpayer s contracts with its customers had to specifically require that the subcontractors be paid for the labor was rejected. Gulf Copper and Manufacturing Corp. v. Hegar (Tex. App. Aug. 11, 2017). TX The taxpayer s use of the federal COGS calculation as a starting point for calculating the Texas COGS deduction did not provide sufficient evidence to support the taxpayer s claimed COGS deduction. Texas law mandates that the COGS deduction be computed on an item-by-item basis. Gulf Copper and Manufacturing Corp. v. Hegar (Tex. App. Aug. 11, 2017). TX Under Texas law, the cost of goods sold deduction includes various costs associated with the production of goods. Production includes construction, installation, manufacture, development, mining, extraction, improvement, creation, raising, or growth. Effective September 1, 2017, the definition of production, for purposes of the costs of goods sold deduction, has been amended to eliminate the term installation. House Bill 4002 (signed June 1, 2017). TX 13 TWIST-Q 2017 Summary of developments

14 Tax Base Impact The annual election to capitalize or expense COGS cannot be revised on an amended return. An ALJ rejected a taxpayer s argument that altering the computation of COGS was correcting mathematical errors on its amended returns, as opposed to changing its annual election to capitalize or expense COGS. Furthermore, the regulation limiting the ability to revise the annual election was valid. Texas Comptroller Decision No. 110,749 (July 28, 2016; released Apr. 2017). TX In its original decision, the court (relying on the first prong of Texas s statutory definition of tangible personal property) held that because a movie is perceptible to the senses the taxpayer was selling tangible personal property when it sold tickets to movies. In a revised opinion, the court limited its review of the evidence presented at trial to whether AMC s product fell within the second prong of the Texas definition of tangible personal property, which addresses films and other similar property. The court concluded that AMC was selling tangible personal property under this prong of the definition. AMC v. Hegar (Tex. Ct. App. Jan. 6, 2017). TX A broadcaster could not deduct, as COGS, costs related to transmitters, antennas and towers, as such costs were related to distributing television and radio content. Under Texas law, only costs related to the acquisition, production, or use of radio and television programs were includable in COGS. Texas Hearing Decision Nos. 111,560 and 111,561 (Sept.12, 2016). TX The Utah losses of a corporation that was merged out of existence due to an acquisition could not be used to offset income earned by the corporate division that maintained the same operations as the original corporation. Utah Tax Commission Appeal (Nov. 1, 2016). UT 14 TWIST-Q 2017 Summary of developments

15 Tax Base Impact For the tax years at issue (not addressing retroactive legislation that revised the law), the subject to tax exception to the related party addback statute applied to the extent that the royalties were actually taxed in separate return states (by virtue of the related member being subject to tax), combined return states, or in states with addback rules (by virtue of the taxpayer adding the expense back to federal taxable income). Kohl's Department Stores, Inc. v. Virginia Dep t of Taxation (Va. Aug. 31, 2017). VA An NOL cannot offset Wisconsin income unless the incurred loss was computed on a return that was filed within four years of the unextended due date for filing the original return for the tax year in which the loss was incurred. A corresponding provision likewise provides that a loss cannot be carried back unless claimed within four years of the un-extended due date for filing the original return for the taxable year to which the loss is carried back. Assembly Bill 64 (signed Sept. 22, 2017). WI Apportionable or Allocable Income Impact Gain from the sale of tax credits was business income under the so-called functional test. Administrative Decision Dkt (Ark. Office of Hearings and Appeals Aug. 7, 2017). AR A bank s dividends from a minority investment in a Chinese bank constituted non-business income. Notably, the Board rejected arguments that there was an operational relationship between the entities. In re Bank of America Corp., (Cal. Bd. Equal. Nov. 14, 2017). CA 15 TWIST-Q 2017 Summary of developments

16 Apportionable or Allocable Income Impact Gain from the sale of a subsidiary was nonbusiness income because the taxpayer played no role in the management of the subsidiary and the subsidiary maintained its own management team, research agenda and operating policies and procedures. E.I. DuPont De Nemours and Co. v. Indiana Dep t of Revenue (Ind. Tax Ct. July 11, 2017). IN For tax years beginning after December 31, 2017, the term business income is replaced with apportionable income and the definition is expanded to include all income that is apportionable under the U.S. Constitution. House Bill 511 (signed May 3, 2017). MT Effective for tax years beginning on or after January 1, 2018, the term "business income" is changed to "apportionable income" and includes all income that is apportionable under the U.S. Constitution. House Bill 2275 (signed May 15, 2017). OR Apportionment Changes and Developments Impact Effective for tax years beginning on or after January 1, 2017, if the Department of Revenue s apportionment rule for financial institutions includes a property factor, loans and credit card receivables must be considered part of a financial institution s property and must be sourced using the same method used for interest receipts from related loans and credit card receivables. If, on or before December 31, 2030, a majority of states, including two contiguous to Alabama, employ a property factor for financial institution apportionment and exclude from the factor loans and credit card receivables, then the Department must promulgate a rule consistent with the law in those states. House Bill 263 (signed Apr. 20, 2017). AL 16 TWIST-Q 2017 Summary of developments

17 Apportionment Changes and Developments Impact Although not specified in the statute, the Department s position that a taxpayer must request permission to use an alternative apportionment formula was entitled to deference. The petition must be submitted in writing prior to the filing of an original return and cannot be made in conjunction with the filing of an amended return. Administrative Decision # (Office of Hearings and App. Dec. 1, 2017). AR Effective for tax years beginning on or after January 1, 2018, a partnership that files an Arkansas partnership return and has income from both within and without Arkansas must apportion income to Arkansas under the Uniform Division of Income for Tax Purposes Act. All partnership income from activities within Arkansas that is reflected on a partnership return will then be allocated to Arkansas by each partner. House Bill 1562 (signed Mar. 14, 2017). AR A taxpayer s divestments were substantial and occasional in nature and therefore gross receipts arising from such transactions were excluded from the numerator and denominator of the sales factor. Chief Counsel Ruling (Cal. FTB Oct. 18, 2017). CA When a taxpayer provides a service to a business customer that benefits both the taxpayer s direct customers and its customers customers and the service is a marketing service, it may be appropriate to look-through to where the taxpayer s customer s customers received the benefit of the service. If the service is a nonmarketing service, the benefit is received where the taxpayer s direct customer receives the benefit of the service. Chief Counsel Ruling (Cal. FTB Apr. 7, 2017). CA 17 TWIST-Q 2017 Summary of developments

18 Apportionment Changes and Developments Impact Because the amendments to California s regulation for sourcing sales of other than tangible personal property apply retroactively to taxable years beginning on or after January 1, 2015, certain taxpayers may need to file amended or original returns as a result of the revised regulation. In this instance, the FTB will waive late payment penalties. The FTB will not grant similar relief for delinquent filing penalties, which would occur if the taxpayer, applying the revised regulation, now has a California filing obligation. A taxpayer's remedy in the case of a delinquent return would be to submit a claim for refund of the amount paid to satisfy a delinquent filing penalty. The FTB will consider such claims on a case-by-case basis. The Notice includes specific instructions for requesting relief. Notice (Cal. FTB Mar. 29, 2017). CA The statutory apportionment formula did not fairly represent a taxpayer s activity in Colorado when the taxpayer had no property or payroll in Colorado and no sales sourced under the statutory method, but the taxpayer received hundreds of millions of dollars in royalties from Colorado sources. However, because the taxpayer had substantial business activities in other states, the Department s proposed formula using only the retail entity s sales was not reasonable and the court ordered the Department to include the taxpayer s own property and payroll in the alternative formula. Target Brands, Inc. v. Colo. Dep t of Revenue (Colo. Dist. Ct. Jan. 27, 2017). CO For tax periods beginning after December 31, 2016 and before January 1, 2018, the sales factor is double-weighted. Del. Code Ann. 1903(b)(6). DE 18 TWIST-Q 2017 Summary of developments

19 Apportionment Changes and Developments Impact When the activity producing the taxpayer s sales revenue occurs entirely in Florida, the receipts from the Florida activity are deemed to be Florida sales. The income-producing activity occurs entirely in Florida when a taxpayer s customer is physically located in Florida. Technical Assistance Advisement 17C1-004 (Fla. Dep t of Revenue Apr. 17, 2017). FL An online university s receipts from students with Indiana billing addresses were not attributable to Indiana. The taxpayer had multiple income-producing activities and a cost study established that the greater proportion of those activities occurred outside of Indiana. University of Phoenix v. Indiana, Dep t of Revenue (Ind. Tax Ct. Nov. 30, 2017). IN A taxpayer that was required to include the income and factors of a foreign IP subsidiary in computing its Indiana corporate income tax liability was not required to throw receipts back to Indiana that were attributed to countries where the IP subsidiary had nexus. In sum, applying a Finnigan concept, the IP subsidiary's nexus was attributed to the taxpayer in determining whether the throwback rule applied. Letter of Findings No R (Ind. Dep t of Revenue Aug. 30, 2017). IN Receipts from providing online education to Indiana students were sitused to Indiana rather than the location where the taxpayer s course development and production occurred. Letter of Findings No (Ind. Dep t of Revenue July 26, 2017). IN Effective July 1, 2017, the party seeking to require the use of an alternative apportionment method bears the burden of proof that the standard allocation and apportionment provisions do not fairly represent the taxpayer's income derived from sources within the state and that the alternative method is reasonable. Senate Bill 440 (signed Apr. 13, 2017). IN 19 TWIST-Q 2017 Summary of developments

20 Apportionment Changes and Developments Impact An Indiana-based company was providing zinc galvanizing services, not selling zinc, and was therefore required to use the income producing activity test to source its receipts. Because all of the taxpayer s activities were performed in Indiana, receipts from sales to out-of-state customers were sourced to Indiana. Final Order R (Ind. Dep t of Revenue May 31, 2017). IN In determining whether 25 percent or more of the taxpayer s gross receipts were derived from the sale of goods that it manufactured (so that it was required to use the single-sales factor available to manufacturers), certain treasury function receipts were excluded from the measure of gross receipts, which was not defined by statute. Genentech, Inc. v. Commissioner of Revenue (Mass. Sup. Jud. Ct. Jan. 12, 2017). MA The Tax Commissioner could not use her equitable apportionment authority to disregard the taxpayers tax structure and reverse apportionment benefits achieved by the taxpayers use of two LLCs to hold loans. Assoc. Bank. v. Commissioner of Revenue (Minn. Tax Ct. Apr. 18, 2017). MN Effective for tax years beginning after December 31, 2017, the sales factor is replaced with the receipts factor. Receipts is defined as all gross receipts not allocated that are received from transactions and activity in the regular course of the taxpayer's trade or business. Receipts from hedging transactions and from the maturity, redemption, sale, exchange, loan, or other disposition of cash or securities are excluded. House Bill 511 (signed May 3, 2017). MT Effective for tax years beginning after December 31, 2017, receipts other than receipts from sales of tangible personal property are attributed to Montana if the taxpayer's market for the sale is in the state. Specific rules apply to determine if the taxpayer's market for sales is in Montana. House Bill 511 (signed May 3, 2017). MT 20 TWIST-Q 2017 Summary of developments

21 Apportionment Changes and Developments Impact Assets that were the subject of a sale/leaseback transaction that had been invalidated by the IRS were not owned for New Jersey Corporation Business Tax purposes. The taxpayer did not have sufficient ownership of the assets to warrant inclusion of the assets in the property fraction or the imputed rental income in the receipts fraction. General Food Credit Investors #3 v. Director, Division of Taxation (N.J. Tax Ct. Feb. 22, 2017). NJ Receipts excluded from another state s receipts factor based on a regulatory exclusion for potentially distortive receipts were not required to be thrown out of the New Jersey sales factor. The other state had the ability to tax the receipts, but simply chose to exclude the receipts to eliminate distortion. In addition, sales that a state could have required to be thrown back (but were not) were not subject to throw out of the New Jersey receipts factor. Elan Pharmaceuticals, Inc. v. Division of Taxation (N.J. Tax Ct. Feb. 6, 2017). NJ For taxable years beginning on or after January 1, 2017, property, payroll, and sales factors are weighted 3.5 percent, 3.5 percent, and 93 percent respectively. NYC Admin. Code (3)(a)(10)(ix). NY (city) A taxpayer s web-based litigation support receipts were service receipts sourced to Colorado where its services were performed, rather than other business receipts, despite the fact that the services were provided over the Internet. The Department had asserted that because there was no human involvement in the transactions that generated the receipts and the taxpayer was providing access to software, the receipts must be treated as other business receipts attributed to New York if the customers were in New York. Matter of Catalyst Repository Systems, Inc. (N.Y. Div. Tax App. Aug. 24, 2017). NY 21 TWIST-Q 2017 Summary of developments

22 Apportionment Changes and Developments Impact For tax years beginning on or after January 1, 2017 and before January 1, 2018, the three-factor apportionment formula consists of the sum of the property factor, the payroll factor, and four times the sales factor, divided by six. N.C. Gen. Stat (i). NC Effective for taxable years beginning on or after January 1, 2017, receipts from transportation of a petroleumbased liquid pipeline company must be apportioned by multiplying the income by a fraction, the numerator of which is the number of barrel miles in North Carolina during the tax year and the denominator of which is the total number of barrel miles everywhere during the tax year. Barrel mile means one barrel of liquid property transported one mile. Senate Bill 628 (signed Aug. 11, 2017). NC For municipal income tax purposes, the throwback rule is repealed effective for tax years beginning on or after January 1, This rule requires receipts from sales of goods to be sourced to the jurisdiction of origination if they are shipped from a place within the municipal corporation to purchasers outside the municipal corporation, and the taxpayer is not, through its own employees, regularly engaged in the solicitation or promotion of sales at the place where delivery is made. House Bill 49 (signed June 30, 2017). OH An online university s income-producing activity of providing course sections was composed of its faculty, its curriculum development team, and its ecampus platform. However, the only direct costs used to apportion the taxpayer s receipts under the incomeproducing activity test were costs related to faculty. Apollo Education Group, Inc. and Subs. v. Dept. of Revenue (Ore. Tax Ct. Aug. 24, 2017). OR 22 TWIST-Q 2017 Summary of developments

23 Apportionment Changes and Developments Impact Effective for tax years beginning on or after January 1, 2018, sales, other than sales of tangible personal property, are sourced to Oregon if the taxpayer s market for the sale is in Oregon. Specific rules apply in determining whether the market for certain types of sales is in Oregon and service receipts will be attributed to Oregon if and to the extent the service is delivered in Oregon. These provisions do not apply to financial institutions and public utilities. Senate Bill 28 (signed July 3, 2017). OR The taxpayer s income-producing activity was the delivery of signal to customers. Thus, 100 percent of receipts from South Carolina subscribers were included in the numerator of the South Carolina gross receipts factor. DIRECTV, Inc. v. South Carolina Dep t of Revenue (S.C. App. Aug. 30, 2017). SC Effective January 1, 2017, taxpayers whose principal business in Tennessee is manufacturing may elect to use a single-receipts apportionment formula. A taxpayer's principal business in Tennessee is manufacturing if more than fifty percent of the revenue derived from the taxpayer s activities in Tennessee, excluding passive income, is from fabricating or processing tangible personal property for resale and consumption off the premises. House Bill 534 (signed Apr. 26, 2017). TN For tax years beginning on or after July 1, 2016, a Tennessee taxpayer may apportion its business income subject to excise tax and its nonconsolidated net worth subject to franchise tax if it also has business activities in another state, and the business activities performed in the other state are substantial enough to give the taxpayer nexus in the other state under Tennessee's definition of substantial nexus, which looks at whether the taxpayer has a certain amount of in-state sales. Tennessee DOR FAQs (Jan. 5, 2017). TN 23 TWIST-Q 2017 Summary of developments

24 Apportionment Changes and Developments Impact The Comptroller recently announced a new policy in light of the holding in the Hallmark case. Going forward, taxpayers will net gains and losses from sales of capital assets and investments. If there is a net overall loss, it will not reduce gross receipts everywhere. If there is a net gain, that amount will be included in the receipts factor denominator. The same netting exercise applies for purposes of determining the numerator. Letter No L (Tex. Comptroller of Public Accounts July 7, 2017). TX If services are performed both inside and outside Texas, service receipts are sourced to Texas on the basis of the fair value of the services that are rendered in Texas. Although certain activities were performed in Texas and servers were located in Texas, a Texas company s web-based risk and fraud detection services were performed entirely at the company s customers locations where customers received the output of the service on their computer screens. Because the service was performed entirely outside of Texas when the customer was out-of-state, there was no need to perform a fair value analysis. Private Letter Ruling L (Texas Comptroller of Public Accounts Mar. 15, 2017). TX The sales factor includes the gross amount associated with the sell side of buy/sell agreements because such amounts are reported on line 1 of the federal form Taxpayer v. Auditing Division (Utah Tax Comm n Nov. 7, 2017). UT 24 TWIST-Q 2017 Summary of developments

25 Apportionment Changes and Developments Impact Under prior law, a service receipt was assigned to Wisconsin if it related to tangible personal property that was in Wisconsin when the service was received or related to tangible personal property delivered to customers in Wisconsin. Effective for tax years beginning on or after January 1, 2017, the provision that a service receipt will be assigned to Wisconsin if it relates to tangible personal property that was in Wisconsin when the service was received is eliminated. Under prior law, a service was considered to be received in Wisconsin if it was provided to an individual who was physically present in Wisconsin at the time that the service was received. Under the revised law, the service will be considered to be in Wisconsin if it is purchased (rather than provided to) by an individual who is physically present in Wisconsin at the time that the service is received. Assembly Bill 64 (signed Sept. 22, 2017). WI New sourcing provisions for broadcasters (as defined) are effective for tax years beginning after December 31, Assembly Bill 64 (signed Sept. 22, 2017). WI Receipts from licensing the right to install and replicate proprietary software in computers sold by the licensees were receipts from licensing an intangible right apportioned using the income-producing activity test, rather than provisions addressing receipts from the use of software. The relevant income-producing activity was not the sale of computers in Wisconsin because the taxpayer was not the entity selling the computers. Microsoft Corp. v. Wisconsin Dep t of Revenue (Wisc. Tax App. Commission Aug. 10, 2017). WI 25 TWIST-Q 2017 Summary of developments

26 Filing Methodologies Impact Although not specifically stated in the statute or regulations, goodwill is considered a business asset for purposes of the total business assets test, which applies when there is an acquisition between a water s-edge filer and a worldwide filer. Because the goodwill at issue was integral to the target company s business, it was attributed to the company. Because the value of the target company s total business assets, including the goodwill, was larger than that of the acquiring company when the new unitary affiliate group was established, the acquiring company was deemed to have made a water's-edge election. Chief Counsel Ruling (Cal. FTB Sept. 8, 2017). CA A holding company was excluded from the taxpayer s combined group because it did not have any property and payroll in the U.S. A corporation with no property and payroll cannot meet the definition of an includable corporation, which is any corporation with more than 20 percent of its property and payroll assigned to U.S. locations. Agilent Technologies, Inc. v. Dep t of Revenue (Colo. App. Nov. 2, 2017). CO A company could not be included in the domestic combined group because, when counting the property and payroll of its four foreign disregarded subsidiaries, more than 80 percent of the holding company s property and payroll was outside the U.S. Agilent Technologies, Inc. v. Dep t of Revenue (Colo. App. Nov. 2, 2017). CO 26 TWIST-Q 2017 Summary of developments

27 Filing Methodologies Impact For tax years ending prior to December 31, 2017, no unitary group shall include members that are ordinarily required to apportion under different subsections. Thus, calendar year taxpayers with a December 31, 2017 year-end will file as a single unitary group for the 2017 tax year and forward, even if required to use different apportionment methodologies. Senate Bill 9 (veto overridden July 6, 2017). IL Under Illinois law, group members whose business activities outside the United s equal 80 percent or more of their total business activity are excluded from the combined group. Effective for tax years ending on or after December 31, 2017, "United s means only the 50 states, the District of Columbia, and any area over which the United s has asserted jurisdiction or claimed exclusive rights with respect to the exploration for or exploitation of natural resources, but does not include any territory or possession of the United s. For tax years ending before December 31, 2017, United s means only 50 states and the District of Columbia. Senate Bill 9 (veto overridden July 6, 2017). IL A court rejected a taxpayer s argument that a holding company that owned intangible property (a trademark) used by its Iowa subsidiaries, had the functional equivalent of a physical presence in Iowa related to its ownership of the subsidiaries and should be included in the consolidated group. Citing to Myria Holdings, the court held that the holding company was not includable in the Iowa consolidated group. Romantix Holdings, Inc. et al. v. Iowa Dep t of Revenue (Iowa Ct. App. May 3, 2017). IA 27 TWIST-Q 2017 Summary of developments

28 Filing Methodologies Impact Iowa law provides an exemption from corporate income tax for a corporation whose activities are limited to owning and controlling a subsidiary corporation and that lacks a physical presence in Iowa related to its ownership or control. A court rejected a parent s argument that it did more than simply owning or controlling a subsidiary corporation when it provided various managerial and administrative services, and financial support to its subsidiaries. As such, the parent qualified for the exemption and was excluded from the Iowa consolidated group. Myria Holdings Inc. & Subs. v. Iowa Dep t of Revenue (Iowa Mar. 24, 2017). IA All unitary business groups and their members affected by the LaBelle decision must correct their filings for all open years (for both MBT and CIT purposes). Penalties will not be imposed for amended unitary returns or original stand-alone returns that are a direct result of LaBelle. The Department will waive interest for returns that are a direct result of LaBelle so long as those returns are filed by December 31, Notice to Taxpayers Regarding LaBelle Management (Mich. Dep t of Treasury Feb. 28, 2017). MI The Michigan Supreme Court declined to review an appeals court decision holding that, for purposes of the unitary business group control test requirement, indirect ownership does not equate to constructive ownership under the IRC 318 attribution rules. Rather, indirect ownership means ownership through an intermediary. In sum, the court of appeals decision eliminates constructive ownership or ownership through attribution as a means of satisfying the unitary business group control test. LaBelle Management, Inc. v. Dep t of Treasury (review denied Jan. 24, 2017). MI 28 TWIST-Q 2017 Summary of developments

29 Filing Methodologies Impact Although foreign entities are generally excluded from the water s-edge combined group, the income and factors of a foreign disregarded entity were included, along with those of its domestic owner, in the Minnesota combined return for the tax years at issue. Ashland Inc. and Affiliates v. Commissioner of Revenue (Minn. Aug. 2, 2017). MN For tax years beginning after December 31, 2016, insurance companies (defined with reference the IRC) are excluded from the unitary combined group if they are licensed to engage in the business of insurance in Minnesota or domiciled or licensed to engage in the business of insurance in another state that imposes retaliatory taxes on Minnesota companies. Furthermore, insurance companies will be exempt from corporate franchise tax if they meet the definition of an insurance company not includable in the unitary group or are an insurance company that is licensed and domiciled in another state that grants, on a reciprocal basis, an exemption from retaliatory taxes. House File 1 (signed May 30, 2017). MN For tax years beginning after December 31, 2016, the definition of a financial institution has been amended and expanded to include, among other things, any business entity more than 50 percent owned, directly or indirectly, by a financial institution or a business entity that derives more than 50 percent of its gross income for financial accounting purposes from finance leases. A financial institution also includes any other person or business entity (other than an insurance company subject to premiums tax) that derives more than 50 percent of its gross income from activities that a financial institution is authorized to conduct. These changes reverse the Associated Bank v. Commissioner decision. House File 1 (signed May 30, 2017). MN 29 TWIST-Q 2017 Summary of developments

30 Filing Methodologies Impact The New Jersey Division of Taxation exceeded its authority when it amended the investment company regulation to essentially exclude from the definition of other securities (for purposes of the qualifying investment asset test) any investment in an operating partnership. The amended definition was contrary to the generally accepted definition of a security under U.S. Supreme Court caselaw, which New Jersey courts look to for guidance. Manheim NJ Investments, Inc. v. Division of Taxation (N.J. Tax Ct. Feb. 27, 2017). NJ A taxpayer that added back the royalties paid to its affiliate was nevertheless required to consider the royalty payments in determining whether the substantial intercorporate transaction test was met for purposes of determining whether the entities were combinable for the tax years at issue. The taxpayer s argument that because of the addback, it had essentially backed out the intercorporate transactions, was rejected. Matter of the Petition of Whole Foods Market Group (N.Y. Tax App. Trib. Sept. 11, 2017). NY For the tax years at issue, certain HMOs were not doing an insurance business in New York and were not excluded from the New York City general corporate tax combined group. Matter of Aetna, Inc. v. New York City Tax Appeals Trib. (N.Y. App. Div. Oct. 19, 2017). NY (city) Effective for tax years beginning on or after January 1, 2018, the Department of Revenue may consider the role of any corporation owned directly or indirectly by the same interests when determining whether or not corporations are unitary. Previously, the Department could generally consider only corporations that were doing business in the United s and were subject to federal income tax. Senate Bill 30 (signed May 30, 2017). OR 30 TWIST-Q 2017 Summary of developments