Presenting a live 110-minute teleconference with interactive Q&A. Today s faculty features:

Transcription

1 Presenting a live 110-minute teleconference with interactive Q&A State Corporate Income Apportionment Key Fundamentals Understanding Trends and State Approaches to Factor Weighting, Service Revenue, Joyce vs. Finnigan and Other Apportionment Concepts WEDNESDAY, MAY 15, pm Eastern 12pm Central 11am Mountain 10am Pacific Today s faculty features: Richard Call, Attorney, Morrison & Foerster, New York Kelly Brown, Director, State and Local Tax Group, PricewaterhouseCoopers, Boston Marianne Evans, Senior Manager, KPMG, Washington, D.C. For this program, attendees must listen to the audio over the telephone. Please refer to the instructions ed to the registrant for the dial-in information. Attendees can still view the presentation slides online. If you have any questions, please contact Customer Service at ext. 10.

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5 State Corporate Income Apportionment Key Fundamentals Seminar May 15, 2013 Richard Call, Morrison & Foerster Kelly Brown, PricewaterhouseCoopers Marianne Evans, KPMG

6 Today s Program Business Vs. Non-Business Income [Richard Call] Apportionment Formula Key Concepts [Richard Call] Sales Factor [Kelly Brown and Marianne Evans] Property Factor [Richard Call] Payroll Factor [Marianne Evans] Specific Industry Apportionment [Kelly Brown] Combined/Consolidated Return Issues [Richard Call] Latest Important Developments [Kelly Brown] Slide 8 Slide 10 Slide 11 Slide 14 Slide 15 Slide 26 Slide 27 Slide 33 Slide 34 Slide 39 Slide 40 Slide 44 Slide 45 Slide 50 Slide 51

7 Notice ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY THE SPEAKERS FIRMS TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN. You (and your employees, representatives, or agents) may disclose to any and all persons, without limitation, the tax treatment or tax structure, or both, of any transaction described in the associated materials we provide to you, including, but not limited to, any tax opinions, memoranda, or other tax analyses contained in those materials. The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.

8 Richard Call, Morrison & Foerster BUSINESS VS. NON-BUSINESS INCOME

9 Apportionable V. Non-Apportionable Income Constitutional framework Apportionment formula may only apply to apportionable income. The U.S. Constitution prohibits a state from apportioning income that has no connection to the taxing state. Statutory framework Many states use a statutory term, business income, to determine what income is apportioned to the state. Non-apportionable or non-business income can be specifically allocated by statute. 9

10 What Is Apportionable Income? Constitutional framework To be apportionable, income must come from a unitary business. Indicators of a unitary business are flows of value, which have been expressed as: Functional integrations Centralization of management Economies of scale Statutory framework Historically, business income was defined in UDITPA as income arising from transactions and activity in the regular course of the taxpayer s trade or business and includes income from tangible and intangible property if the acquisition, management, and disposition of the property constitute integral parts of the taxpayer s regular trade or business operations. Some states define business income as all income apportionable under the Constitution. 10

11 Richard Call, Morrison & Foerster APPORTIONMENT FORMULA KEY CONCEPTS

12 Apportionment U.S. Supreme Court precedent has interpreted the Commerce Clause to require fair apportionment. What is fair apportionment? Do taxpayers have a right to apportion? If so, when? Apportionment formula must reasonably reflect how income is generated. This is MoFo. 12

13 What Factors Are Used? This is MoFo. 13

14 Weighting Of Factors This is MoFo. 14

15 Kelly Brown, PricewaterhouseCoopers Marianne Evans, KPMG SALES FACTOR

16 Notice ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY KPMG TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN. You (and your employees, representatives, or agents) may disclose to any and all persons, without limitation, the tax treatment or tax structure, or both, of any transaction described in the associated materials we provide to you, including, but not limited to, any tax opinions, memoranda, or other tax analyses contained in those materials. The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser. 16

17 Sales Factor: What Is Included? I. UDITPA refers to total sales but defines sales as all gross receipts of the taxpayer not allocated. II. The MTC regulations specify that sales includes all gross receipts derived by the taxpayer from transactions and activity in the regular course of the trade or business. 17

18 Sales Factor: What Is Excluded? I. MTC regulations exclude: A. Substantial amounts of gross receipts from the occasional sale of fixed assets used in the taxpayer s business B. Insubstantial amounts that do not materially affect the factors C. Receipts on which the IPA cannot be localized II. States have specific exclusions: 18 A. Receipts other than receipts from the principal business activity B. Receipts from sale of certain assets C. Receipts from income not included in the tax base

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20 Sales Factor: Gross Receipts Or Net Gain? I. UDITPA and the MTC regulations refer to gross receipts. II. However, the MTC regulations were amended in 2001 and now provide that only the overall net gain from the sale, exchange or other disposition of liquid assets in a taxpayer s treasury function are included. A. Only a few states have adopted this modification to the MTC regulations (e.g., HI, ID, UT). B. Other states have similar rules that allow inclusion of only net gains on sales of intangible property (e.g., IL). 20

21 Sales Factor: Sourcing Of Sales Of TPP I. UDITPA A. Sales of TPP are in this state if the property is delivered or shipped to a purchaser, other than the U.S. government, within this state. II. MTC regulations A. Does not matter if the property is ordered from another location B. Does not matter if purchaser subsequently transfers the property to another state C. Drop shipments: Sourced to where the ultimate recipient of the property is situated (your customer s customer) 21

22 Sales Factor Sourcing: Dock Pick-up Sales I. delivered or shipped to a purchaser within this state A. Does within this state modify delivered or shipped or purchaser? II. If the purchaser picks up goods at seller s dock and then transports them to another state for use, to which state are the sales sourced? A. Most state courts have held that such sales are sourced to the state of ultimate destination. 22

23 Sales Factor: Throwback I. UDITPA A. Sales of TPP are in this state if the property is shipped from an office, store, warehouse, factory or other place of storage in this state, and the taxpayer is not taxable in the state of the purchaser. II. How do UDIPTA and/or the MTC regulations define taxable in the state of the purchaser? A. Being subject to a net income tax, franchise tax for the privilege of doing business, or a corporate stock tax in another state B. Another state having the right to impose a net income tax, even if it does not actually impose such a tax 23

24 Sales Factor: Sourcing Of Non-TPP Sales I. UDITPA 17 A. Sales, other than sales of TPP, are in this state if: 1. The income-producing activity (IPA) is performed in this state, or 2. The IPA is performed both in and outside this state, and a greater proportion of the IPA is performed in this state than in any other state based on costs of performance. 24

25 Sales Factor: Definitions I. IPA - MTC Reg. IV.17.(2) A. IPA applies to each separate item of income and means the transactions and activity directly engaged in by the taxpayer in the regular course of its trade or business for the ultimate purpose of obtaining gains or profits. II. Costs of performance - MTC Reg. IV.17.(3) A. Direct costs determined in a manner consistent with generally accepted accounting principles and in accordance with accepted conditions or practices in the trade or business of the taxpayer 25

26 Sales Factor: Market-Sourcing Issues I. How do you determine where a service is received? II. How do you define the benefit of a service? III. How do you determine where the benefit is received? IV. When do you look through to the ultimate customer or ultimate marketplace? V. What is a fixed or regular place of business? 26

27 Richard Call, Morrison & Foerster PROPERTY FACTOR

28 Property Factor Uniform Division of Income for Tax Purposes Act (UDITPA) Owned and leased real and tangible personal property are included in the factor. Owned property is valued at its original cost unless original cost is not known; then, FMV at time of acquisition is used. Leased property is valued at 8 times the annual rental amount. The factor is determined by using an average of beginning- and endof-year values. Storage fees Multistate Tax Commission Reg. IV.11(b)(3) A taxpayer stores part of its inventory in a public warehouse. The total charge for the year was $1,000 of which $700 was for the use of storage space and $300 for inventory insurance, handling and shipping charges, and C.O.D. collections. The annual rent is $700. This is MoFo. 28

29 Property Factor (Cont.) Movable property Multistate Tax Commission Reg. IV.10(d) The value of mobile or movable property such as construction equipment, trucks or leased electronic equipment which are located within and without this state during the tax period shall be determined for purposes of the numerator of the factor on the basis of total time within the state during the tax period. An automobile assigned to a traveling employee shall be included in the numerator of the factor of the state to which the employee's compensation is assigned under the payroll factor or in the numerator of the state in which the automobile is licensed. This is MoFo. 29

30 In-transit property Property Factor (Cont.) Property in transit between locations of the taxpayer to which it belongs shall be considered to be at the destination for purposes of the property factor. Cal. Code Regs. tit. 18, 25129(d) Inventory in transit from one state to another is not included in the denominator of the property factor. N.J. Admin. Code 18:7-8.4(c)(3) Maryland required inclusion of the value of automobiles on the high seas in the Maryland numerator, despite the fact that in-transit inventory was not addressed in the property factor statute. Mercedes Benz of N. Am., Inc. v. Comptroller of Treasury, Dkt. No. 2813, (Md. Tax Ct. Oct. 7, 1988) This is MoFo. 30

31 Property Factor For Banks Loans in property factor Minnesota - Minn. Stat , Subd. 11 Secured loans are attributable to Minnesota if the security is in Minnesota. Unsecured consumer loans or consumer loans secured by intangibles are attributed to Minnesota if the loan was made to a resident of Minnesota. Unsecured commercial loan and installment obligations are attributable to Minnesota if the proceeds of the loan are to be applied in Minnesota. Loans will generally include credit card receivables. This is MoFo. 31

32 Property Factor For Banks (Cont.) Loans in property factor (Cont.) MTC A loan is considered to be located within this state if it is properly assigned to a regular place of business of the taxpayer within this state. A loan is properly assigned to the regular place of business with which it has a preponderance of substantive contacts. To determine the state in which the preponderance of substantive contacts relating to a loan have occurred, the facts and circumstances regarding the loan at issue shall be reviewed on a case-by-case basis and consideration shall be given to such activities as: Solicitation Investigation Negotiation Approval Administration This is MoFo. 32

33 Property Factor Meredith Corp. (N.Y. App. Div. 2012) Is programming delivered via satellite TPP includable in the property factor? Policy change When litigation commenced, programming delivered via videotape was considered TPP by the department. The department changed its policy via a TSB to exclude programming delivered by videotape. This record establishes that programming on videotape had long been considered by the Department as tangible property for purposes of the property factor, and there is no rational distinction for taxation purposes between programming sent to a station on videotape and programming sent via satellite. This is MoFo. 33

34 Marianne Evans, KPMG PAYROLL FACTOR

35 Notice ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY KPMG TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN. You (and your employees, representatives, or agents) may disclose to any and all persons, without limitation, the tax treatment or tax structure, or both, of any transaction described in the associated materials we provide to you, including, but not limited to, any tax opinions, memoranda, or other tax analyses contained in those materials. The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. Printed in the U.S.A. FOR INTERNAL USE ONLY. Not for distribution to clients unless the technical and policy review requirements of Tax Services Manual section 23.7 are satisfied. 35

36 Payroll Factor: What Is Included? Total amount paid to employees for compensation Includes salaries, commissions, other taxable remuneration Per the taxpayer s accounting method accrual or cash Includes payroll capitalized as part of cost of asset, for book or tax purposes May elect to use cash method if compensation reported under cash method for unemployment tax purposes Payroll related to production of non-business income is excluded Payroll paid to an employee in an no-nexus /P.L state is included in denominator 2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. Printed in the U.S.A. FOR INTERNAL USE ONLY. Not for distribution to clients unless the technical and policy review requirements of Tax Services Manual section 23.7 are satisfied. 36

37 Payroll Factor: What Is Included? (Cont.) If the factor includes the total compensation paid to employees, who qualifies as employees? Officers? Independent contractors? Leased employees? Others? 2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. Printed in the U.S.A. FOR INTERNAL USE ONLY. Not for distribution to clients unless the technical and policy review requirements of Tax Services Manual section 23.7 are satisfied. 37

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39 Hierarchy Of Payroll Sourcing A. The state in which the employee s services are wholly or substantially performed, if services performed outside of that state are incidental (temporary or transitory) or rendered in connection with isolated transactions B. The state in which the employee s base of operations is located, if some part of the services are performed in that state C. The state from which the employee is directed or controlled, if some part of the services are performed in that state D. The state in which the employee resides 2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. Printed in the U.S.A. FOR INTERNAL USE ONLY. Not for distribution to clients unless the technical and policy review requirements of Tax Services Manual section 23.7 are satisfied. 39

40 Kelly Brown, PricewaterhouseCoopers SPECIFIC INDUSTRY APPORTIONMENT

41 Special Industry Apportionment Three-factor formula works best for merchandising and manufacturing businesses. States allow other formulas, by statute and by taxpayer appeal. Construction: Include work in progress Athletes: Use duty-days Motion pictures: Use audience data Service providers: Use sales or payroll factors only Transportation: Use in-state miles, passenger-miles, train car-miles, tonmiles, time in-port PricewaterhouseCoopers Slide 41

42 Special Industry Apportionment (Cont.) Insurance companies: Use premium dollars written Mutual funds, banks: Use deposits, number of clients, number of cards issued Communications: Use cable-miles, circulation, number of satellite stations on the ground PricewaterhouseCoopers Slide 42

43 Alternative Apportionment Method States may allow department to require, or taxpayer to request, use of an alternative apportionment method. Usual goal is to prevent distortion or clearly reflect income in state. PricewaterhouseCoopers Slide 43

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45 Richard Call, Morrison & Foerster COMBINED/CONSOLIDATED RETURN ISSUES

46 Combination Combined report typically includes unitary members of the combined group on either a worldwide or water s edge basis. Inter-company transactions within the group may be eliminated, for apportionment purposes. Joyce/Finnigan Partnership factor flow-up This is MoFo. 46

47 Combination (Cont.) Appeal of Joyce (Cal. SBE 1966) SBE held that a company s receipts from sales of TPP, shipped to California by a seller that was not taxable in California because of P.L but was part of a unitary business conducted in California, could not be included in the California sales factor numerator. Joyce rule treats each combined group member as a separate entity, for apportionment purposes. Unless an entity has stand-alone nexus, its sales are not included in the sales factor numerator. Effects Combined group members may have to throw back sales not subject to tax in other states in which other combined group members are subject to tax. This is MoFo. 47

48 Combination (Cont.) Appeal of Finnigan (Cal. SBE 1990) SBE overruled Joyce and held that when a combined group member has sales to another state in which the combined group member is not taxable, but in which other unitary combined group members are taxable, the combined group member s sales to that state are not subject to throwback. Finnigan rule treats all combined group members as one entity, for apportionment purposes. Effects All combined group members sales that are sourced to California are included in the numerator, regardless of whether the individual combined group member is subject to tax in California. This is MoFo. 48

49 Combination (Cont.) Partnership factor flow-up How does a state treat the apportionment factors of a partnership or LLC when income from those entities is included in the tax base? Are the factors of the partnership included in computing the tax? California Factors of the partnership flow up if the taxpayer and partnership are engaged in a unitary business. Factors of the partnership do not flow up if the partnership is in a different line of business. This is MoFo. 49

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51 Kelly Brown, PricewaterhouseCoopers LATEST IMPORTANT DEVELOPMENTS