Agenda. Income/franchise tax. Nexus Sourcing of Revenue for Services Uniformity and Simplicity Intercompany Transactions Update. Salt Lunch and Learn

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1 Income/franchise tax Salt Lunch and Learn Agenda Nexus Sourcing of Revenue for Services Uniformity and Simplicity Intercompany Transactions Update Texas Louisiana 2 1

2 Multistate -Nexus Nexus Taxpayer s contact with a state The tax must be applied to an activity with a substantial nexus to the taxing state General Observations Maintaining an office in the state Employees in the taxing state Services Continuous, systematic and regular contact Independent agent Doing business within the state Owning property in the state Deriving income from sources within the state 4 2

3 Additional Nexus Concepts Economic presence Geoffrey v. South Carolina and the use of an intangible in a state Agency nexus Activities of in-state person creates nexus due to agency relationship Affiliate nexus Related companies either by agency or statute 5 Public Law Immunity from state income tax Solicitation By an employee or representative On orders for tangible personal property Sent outside the state for approval Filled by shipment or delivery from a point outside the state Limitation Sale of intangible property Activities connected with the sale of a service Taxes not based on income 6 3

4 Sourcing of Revenue for Services Sourcing Service Revenue Services Cost of performance Assigns receipts to state where costs of performing the services were incurred Market (benefit) theory Source receipts to the state to the extent the recipient of the service receives a benefit in the state New trend Service Performance Source receipts to the state to the extent services are performed in the state Texas 8 4

5 Uniformity and Simplicity Uniformity and Simplicity States are starting to act in a uniform manner which, in some sense, is creating simplicity. States are experiencing the following: Budget and financial difficulties of historical proportions All tax revenues are down, including: income tax, sales tax, property tax, etc. Proposing or passing legislation that closes loopholes, raises taxes or creates new taxes, and attempts to encourage in-state economic development. Proposing or passing legislation enacting new minimum fees or taxes. 10 5

6 Uniformity and Simplicity States are experiencing the following: Proposing or enacting legislation to adopt combined reporting, single-sales factor apportionment, market-based sourcing of revenue from service activities instead of the past cost-ofperformance rules, adopting economic nexus and "amazon" type nexus, etc. Adopting similar language in regards to what is considered to be a "unitary group." Adopting or proposing legislation that accelerates the payment of tax revenue to the taxing jurisdiction by either increasing the % paid with each quarterly estimated payment, and/or requiring non-resident withholding to be paid quarterly instead of annually. Increasing interest rates and penalties for late payment of taxes. 11 Intercompany Transactions 6

7 Transfer Pricing - States States that require separate company filings are looking to IRC Sec. 482 Growing number of states are exercising 482 like power to adjust income/apportionment to more accurately reflect the taxpayer s activities. Issue states lack experience and resources to perform transfer pricing analysis 13 Transfer Pricing - States Types of transactions under scrutiny: IRC 351 non-recognition transfers between related domestic companies that result in income-producing assets moved to low-tax states (e.g., transfer IP from high tax state to low). Intercompany transactions: product sales, intangibles transfers, services, loans, insurance premiums. Intercompany transactions between group and related parties outside of group (e.g., foreign related parties or 80/20 companies, captive insurance companies, non-unitary affiliates). 14 7

8 Updates Texas Margin Tax and 2017 Legislature Comptroller expects little or no changes to Margin or Sales tax laws when the legislature is back in session in 2017 Tax rates for Margin tax are expected to be the same even though revenues are down, rates will hold Push to move Texas from a performance state to a benefit state for the sourcing of revenue from services This process will take some years to get the legislature to act Comptroller wants to improve refund process and the time to review, audit and issue refund check Texas will not get involved in changeling the physical presence standard for sales tax like SD, TN and AL Improved website and updating Texas Margin Tax Rules to better interpret Texas Margin tax laws Updating publications on Comptroller website 16 8

9 Louisiana 2016 Changes Sales factor Corporate taxpayers (e.g., aircraft transportation, pipeline transportation, other transportation, service, manufacturing and all other businesses outside the oil and gas industry) will now utilize single sales factor. The oil and gas industry (including integrated oil and gas companies and taxpayers whose income is primarily derived from the production and sale of unrefined oil and gas) will now use a double-weighted sales factor apportionment formula. Sales sourcing other than sales of tangible personal property will now use market-base sourcing. Throw-out rule for sales sourced to a state in which the taxpayer is not taxable or sales where the proper state assignment cannot be determined or reasonably approximated under the law; such sales must be excluded from the sales factor (i.e., thrown out of the denominator). 17 9