Legislative, regulatory and. judicial income tax. developments: key states

Transcription

1 Legislative, regulatory and judicial income tax developments: key states 14 May 2013

2 Disclaimer Ernst & Young refers to the global organization of member firms of Ernst & Young global limited, each of which is a separate legal entity. Ernst & Young LLP is a client serving member firm of Ernst & Young global limited located in the US. This presentation is 2013 Ernst & Young LLP. All rights reserved. No part of this document may be reproduced, transmitted or otherwise distributed in any form or by any means, electronic or mechanical, including by photocopying, facsimile transmission, recording, rekeying or using any information storage and retrieval system, without written permission from Ernst & Young LLP. Any reproduction, transmission or distribution of this form or any of the material herein is prohibited and is in violation of US and international law. Ernst & Young and its member firms expressly disclaim any liability in connection with use of this presentation or its contents by any third party. The views expressed by panelists in this webcast are not necessarily those of fe Ernst t&y Young LLP. 2 Legislative, regulatory and judicial income tax developments: key states

3 Circular 230 disclaimer Any US tax advice contained herein was not intended or written to be used, and cannot be used, for the purpose p of avoiding penalties that may be imposed under the Internal Revenue Code (IRC) or applicable state or local tax law provisions. These slides are for educational purposes p only and are not intended, and should not be relied upon, as accounting advice. 3 Legislative, regulatory and judicial income tax developments: key states

4 Today's presenters Kim Bott Dean Bruno David Schmutter Doug Card 4 Legislative, regulatory and judicial income tax developments: key states

5 Agenda State of California State of Illinois State of New York Hot topics 5 Legislative, regulatory and judicial income tax developments: key states

6 State of California

7 State of California agenda California status of the legislature 2013 legislation proposed 2013 regulations in process litigation resolved or pending CA Supreme Court CA Appellate Courts 7 Legislative, regulatory and judicial income tax developments: key states

8 California status of the legislature Supermajority or not? Caution in flexing legislative muscles Power in the mod squad legislators Power of the decline to state votes 8 Legislative, regulatory and judicial income tax developments: key states

9 2013 legislation introduced bills Corporate income/franchise tax Net Operating Losses transferable Credits Sales and use tax Manufacturing exemption Aerospace equipment Property tax Parcel tax Personal income tax Cutler fix 9 Legislative, regulatory and judicial income tax developments: key states

10 2013 legislation expected amendments Spot bills Budget trailer bills tax 10 Legislative, regulatory and judicial income tax developments: key states

11 2013 regulations Enterprise zone reform Governor s budget Market-based sourcing part 2 Withholding tax 11 Legislative, regulatory and judicial income tax developments: key states

12 litigation CA Supreme Court Gillette CA Appellate Courts Microsoft II Cutler Bunzl distribution 12 Legislative, regulatory and judicial income tax developments: key states

13 State of Illinois

14 Proposed Illinois tax legislation HB 3157 Department s Bill Amend alternative apportionment statute to align with market-based sourcing rules Require that a nonresident's gain/loss on a sale of a partnership interest be sourced based on partnership s p apportionment factor in the the tax year in which the sale occurred Eliminate composite returns Amend partnership, S Corporation, and trust withholding requirements to require withholding of distributive share of partnership non-business income allocable to Illinois Relation to SB Eighth Annual Domestic Tax Conference

15 Proposed Illinois tax legislation SB 1159 Amend. 1 Governor s Bill Eliminate domestic dividend received deduction and foreign dividend subtraction modification. Decouple from the domestic production activities deduction under IRC 199 Eliminate the like-apportionment rule SB 333 Amends IITA 704A to allow unused hospital credit against withholding obligations 15 Eighth Annual Domestic Tax Conference

16 Proposed Illinois tax legislation HB 3249 Sourcing rules for Retailers Occupation Tax, Use Tax, Service Occupation Tax, and Service Use Tax No change for point-of-sale purchases Potential change for all other sales Determined where most selling activity occurs Twelve listed activities occur at the location with no one activity being determinative ti Order acceptance is now only one of twelve Out of state sales controlled by location of inventory 16 Eighth Annual Domestic Tax Conference

17 Proposed Illinois tax legislation SB 2194 Amends Uniform Penalty and Interest Act to provide penalty for failure to comply with electronic filing and payment requirements Failure to file electronically Until Jan. 1, % of liability without regard to offsetting credits On or after Jan. 1, % of liability Failure to pay electronically 3% of the required payment 17 Eighth Annual Domestic Tax Conference

18 Cook County Non-Titled Use Tax Effective April 1, 2013, new tax imposes a 1.25% use tax on non-titled personal property purchased outside of Cook County but used within the county Potential Constitutional Challenges Taxpayers should: Complete registration form on the county s website Consider how to comply with the tax obligation until (and if) it is rendered unconstitutional 18 Eighth Annual Domestic Tax Conference

19 Enterprise zone reporting requirement Public Act Three new reporting requirements for Enterprise Zones, River Edge Redevelopment Zones, or High Impact Businesses Administrator report Business report Utility company report Reports should be filed using WebFile on the state website by March 30 each year A 60-day extension has been granted for the 2012 report, which is now due May 29, Eighth Annual Domestic Tax Conference

20 Tax Tribunal update Tax Tribunal becomes operative July 1, 2013 Chief Judge announcement expected any day now Procedure for appeals to the Tribunal included in Department s 2013 Regulatory Agenda Chicago Bar Association Task Force working with the Department to develop rules draft 20 Eighth Annual Domestic Tax Conference

21 Case update Met Life/Marriott 2003 Amnesty cases Sales tax whistle blowers Clarcor v. Hamer, 972 N.E.2d 692 (Ill. App. Ct. May 11, 2012) unitary business case Performance Marketing Association, Inc. v. Hamer, Dkt. No CH (Ill. Cir. Ct. May 7, 2012) Illinois Amazon tax legislation l unconstitutional AT&T Teleholdings v. Department, 978 N.E.2d 371 (Ill. App. Ct. June 1, 2012) capital loss carryback case 21 Eighth Annual Domestic Tax Conference

22 Case update Hartney Fuel Oil v. Hamer, 976 N.E.2d 682 (Ill. App. Ct. Sept. 17, 2012) situs for ROT liability at location of seller s acceptance Enterprise Leasing Co. of Chicago, LLC v. The City of Chicago, Dkt. No. 11 L (Ill. Cir. Ct. Sept. 27, 2012) Chicago Ruling 11 violated U.S. Constitution AT&T Teleholdings v. Department, 983 N.E.2d 523 (Ill. App. Ct. December 28, 2012) notice/sol case 22 Eighth Annual Domestic Tax Conference

23 Income tax regulation update Publishing regulation Reg. Sec promulgated in June 2012 Requires sourcing based on circulation factor Includes online publishing and advertising Apportionment regulations Continue to wait for revisions of (Sales Factor computation) 23 Eighth Annual Domestic Tax Conference

24 Income tax regulation update Regulatory Agenda Department s 2013 Regulatory Agenda New rules for Pass-through of investment credits from partnerships and S Corps to partners and shareholders Filing of refund claims and other collection matters, statutes of limitations, and interest computations Amendments to Computation of base income, apportionment rules, filing of returns, and payment Unitary business group definition and income computation Addition and subtraction modifications Computation of foreign tax credit Partnership and S Corp withholding Nexus guidance 24 Eighth Annual Domestic Tax Conference

25 Income tax ruling update IT GIL (3/15/12) Nexus IT GIL (8/17/12) Alternative ti apportionment t request denied IT PLR (10/25/12) Sourcing of gain for purposes of sales factor 25 Eighth Annual Domestic Tax Conference

26 Sales and use regulation update Section and 410 Transportation and delivery charges and cost of doing business not deductible Section Lessor s credit Section Rolling stock 26 Eighth Annual Domestic Tax Conference

27 Sales and use rulings and other updates ST PLR (06/15/2012) Retailer coupons not part of ROT base ST GIL (06/15/2012) Delivery charges not taxable if separately stated ST GIL (09/20/2012) Illinois resale number not required for drop shipments Rebate Sharing Web Application 27 Eighth Annual Domestic Tax Conference

28 State of New York

29 New York combined reporting: regulations Issue date of final regulations: 17 December 2012 Impacts: changes will impact various corporate, bank and insurance franchise tax regulations and codify the New York Department of taxation and finance s interpretation of combined reporting requirements Purpose: to provide additional guidance regarding the January 2007 changes to combined reporting provisions Incorporates: updated regulations for the department s previously issued Technical Services Memorandum (TSB M 08(2)C) issued on 3 March Legislative, regulatory and judicial income tax developments: key states

30 New York combined reporting: key provisions in final regulations adopted 17 December 2012 Unitary business requirement Reg. Sec (a) Combined reporting is now required when three requirements are satisfied: Unitary business Capital stock requirement, and Substantial Intercompany Transaction (SIT) Exception: combined reporting may still be required because of intercompany transactions or some agreement, understanding, arrangement, or transaction Removal of the presumption and transfer pricing considerations: Previous rule: arm s-length pricing could rebut the presumption of distortion established by the existence of SIT Final regulations: mandatory combined reporting was effective for tax years beginning g on or after 1 January Legislative, regulatory and judicial income tax developments: key states

31 Key provisions in combined reporting regulations Regulations clarify capital stock requirement Corporations must be linked by 80% or more common stock ownership Under old regulations, the test was based on the number of shares of voting stock New regulations base stock ownership test on voting power 6 2.2(a)(3) ) 31 Legislative, regulatory and judicial income tax developments: key states

32 Key provisions in combined reporting regulations Regulations update expansion of the definition of SIT Two additional categories of transactions can now establish SIT: Incurring expenses that benefit, directly or indirect, one or more relating corporations Transferring assets, including assets such as accounts receivables, patents, or trademarks from one or more related corporations (Sec ) Additional considerations for SIT: Dividends are not considered for SIT purposes Exception: dividends will be considered for purposes of the asset transfer test Interest is considered including interest on loans that constitutes subsidiary capital (change in dept. policy) Exclusions: regulations expand service functions not considered d for SIT test t by including centralized payroll and intercorporate costs allocation functions 32 Legislative, regulatory and judicial income tax developments: key states

33 Key provisions in proposed combined reporting regulations 10-step process Incorporated in proposed p regulations: the ten-step analysis for determining whether combined reporting is required and which corporations are included in that combined group is now incorporated in Sec Concentric ring approach this process takes a concentric ring approach to adding corporations to the combined group Other key provisions: Capital stock/ownership requirement: now defined by reference to the total voting power rather than the number of shares of stock owned. Sec Different accounting periods now irrelevant: the regulations delete the former requirement that all corporations in a combined group must use the same accounting period. Secs (b), (b) and (b) 33 Legislative, regulatory and judicial income tax developments: key states

34 Considerations Can a combined report be required when the bright-line SIT test is satisfied but related corporations are not engaged g in a unitary business? Combined reporting is permitted or may be required when the SIT test is not satisfied but other elements (unitary business requirement or distortion ) are present. Review provision and accruals to make sure they reflect current guidance. 34 Legislative, regulatory and judicial income tax developments: key states

35 New York qualified manufacturers TSB M 13(1)(C) issued on 8 January 2013 explains guidelines and criteria needed to be classified as an eligible qualified New York manufacturer ( tax years) Tax rate on ENI = 3.25% (reduced from 6.5%) Tax rate on minimum taxable income =.75% (reduced from 1.5%) Fixed dollar minimum tax = one-half the amounts set forth in the law Eligibility requirements: Satisfy the property and receipts tests Have a Metropolitan Commuter Transportation District (MCTD) allocation percentage of less than 15% Have an average of 100 or fewer full-time employees in the state 35 Legislative, regulatory and judicial income tax developments: key states

36 New York receipts sourcing: issue Uncertain manner of sourcing electronic receipts as: Services based upon the location(s) where the services are performed; or Other business receipts where earned under a market share approach 36 Legislative, regulatory and judicial income tax developments: key states

37 New York receipts sourcing: background Electronic receipts are regarded by the New York Department of Taxation (NYDOT) as other business receipts, not services Other business receipts are sourced to the location where such receipts are earned Per NYDOT, electronic receipts are earned where a purchaser accesses the electronic data from a computer. (See TSB A 99(16)C, TSB A 02(3)C, TSB A 00(15)C, TSB A 11(8)C) 37 Legislative, regulatory and judicial income tax developments: key states

38 New York receipts sourcing: considerations Characterization of receipts as a service Arguably, electronic receipts are for services, sourced to the location of performance. See In the matter of Siemens Corp. v. Tax appeals tribunal, 89 N.Y. 2d 1020 (1997) (related-party interest receipts were sourced to New York as other business receipts since the work related to the loan was performed in New York) Does the NYDOT s interpretation exceed case law precedent? Identifying separate revenue streams for services provided (i.e., support services, technical advice, etc ) 38 Legislative, regulatory and judicial income tax developments: key states

39 New York budget bill FY 13/14 (Ch. 59 S.B. 2609D) Amendments to related-member royalty expense add-back provisions Elimination of current royalty y exclusion rule (royalty y payment excluded from FTI if received from a related member that was required to add back royalty payments to FTI for New York tax purposes) Change in definition of related member 39 Legislative, regulatory and judicial income tax developments: key states

40 New York budget bill FY 13/14 (Ch. 59 S.B. 2609D) Amendments to related member royalty expense add-back provisions Replaced with three-part add-back exception test: Related member s royalty income subject to New York or other state tax, payment made to non-related party, and valid business purpose; Related member s royalty income subject to New York or other state tax, and payment to related member where aggregate effective tax rate in other jurisdiction is not less than 80% of New York tax rate; or Payment to foreign-related member under an income tax treaty with the US, related member s royalty income subject to foreign tax, the effective tax rate in other jurisdiction is equal to or greater than New York tax rate, valid business purpose, and royalty payment at arm s length 40 Legislative, regulatory and judicial income tax developments: key states

41 New York budget bill FY 13/14 (Ch. 59 S.B. 2609D) Phased-in qualified manufacturer tax rate reduction 2011 law reduced qualified manufacturer rate from 6.5% to 3.25% beginning 1 January 2012 through 31 December 2014 New law retains the 3.25% tax rate past 2014, and further reduces the rate by the following amounts beginning in 2014: 2014: 9.2% 2015: 12.3% : 15.4% 2018 and after: 25% Also applied to the capital base A qualified manufacturer must satisfy property and receipts tests, have an MCTD allocation percentage of less than 15%, and have an average of 100 or fewer full-time New York employees 41 Legislative, regulatory and judicial income tax developments: key states

42 New York budget bill FY 13/14 (Ch. 59 S.B. 2609D) Credits and incentives Veteran hiring credit Maximum $5,000 to $15,000 credit for full-time veteran hiring from 1 January 2015 to 31 December 2016 Film credit Extension of Empire State film production and post-production credits to 2019 and expanded definition of qualified production and post-production activities Other credits 100% allowance of IRC Section 47(a)(2) credit for historic structures Non-refundable tax credit for electric vehicle recharging property New York innovation hot spots program and tax free zones Youth Works tax credit modification Minimum wage reimbursement credit 42 Legislative, regulatory and judicial income tax developments: key states

43 New York budget bill FY 13/14 (Ch. 59 S.B. 2609D) Personal income tax 25% charitable deduction limitation for taxpayers with adjusted gross income (AGI) over $10 million is extended to 2015 Other changes Extension of Metropolitan Transit Authority (MTA) surcharge through 31 December 2018 Extension of tax modernization provisions (e-file mandate) through 2016 Expansion of compressed natural gas sales and use tax exemption 43 Legislative, regulatory and judicial income tax developments: key states

44 New York Judicial update Easylink Services International, Inc. v. New York State Tax App. Trib., 06/12/12 A global provider of electronic messaging services is liable for sales/use tax on its provision of this service (which included , electronic data interchange, and fax messaging), g) because such services are taxable telephony and telegraphy services Overstock.com, Inc. v. New York State Dep t. of Taxn. And Fin., and Amazon.com, LLC v. New York State Dep t. of Taxn. And Fin., 28/03/13 The New York State Court of Appeals, in a 4-1 ruling, has rejected a constitutional challenge to the state s click-through nexus provision, finding that the taxpayers failed to demonstrate that the statute is facially unconstitutional under either the Commerce or the Due Process Clause 44 Legislative, regulatory and judicial income tax developments: key states

45 Hot topics

46 Hot topics Multistate Tax Commission (MTC) Compact MTC three-factor apportionment vs. states standard apportionment factor States that are members of the MTC compact What does this mean? Cases: California Gillette Co. and subsidiaries v. Franchise tax board Michigan IBM Corp. v. Dep t of Treasury Texas Graphic Packaging Corp. v. Texas comptroller, hearing No. 104,752 Oregon Health net, incorporated and subsidiaries v. Department of Revenue Recent legislation state withdrawals from MTC compact South Dakota Utah 46 Eighth Annual Domestic Tax Conference

47 Hot topics Uniform Division of Income for Tax Purposes Act (UDIPTA) section 18 Alternative apportionment election by taxpayer or imposition by state taxing authority Unusual and incongruous results Distortion exists using current apportionment Alternative apportionment method must be reasonable Retroactive and prospective application Historical cases: Iowa Moorman Manufacturing Co. v. Bair, Director of Revenue of Iowa California Container Corporation of America v. Franchise Tax Board Oregon Twentieth Century Fox Film Corp. v. Department of Revenue 47 Eighth Annual Domestic Tax Conference

48 Hot topics UDIPTA section 18 Recent cases: Tennessee Vodafone Americas Holding, Inc. and Subsidiaries v. Richard H. Roberts, Commissioner of Revenue, State of Tennessee Mississippi Equifax, Inc. and Equifax Credit Info. Services, Inc. v. Department of Revenue California General Mills, Inc. v. Franchise Tax Board South Carolina CarMax Auto Superstores West Coast, Inc. v. South Carolina Department of Revenue Indiana Department of State Rev. v. Rent-A-Center East, Inc. 48 Eighth Annual Domestic Tax Conference

49 Hot topics Nexus Unitary business Minimum contacts within the state Constitutional issues Due Process and Commerce clause Cases: Maryland Comptroller v. Gore Enterprise Holdings, Inc. Tennessee Tennessee v. NM Sumara Tobacco Trading Co. New Jersey BIS LP, Inc. v. Director, Division of Taxation Louisiana UTELCOM, Inc. and UCOM, Inc. v. Bridges 49 Eighth Annual Domestic Tax Conference

50 Questions and answers

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