IPT 2015 Sales Tax Symposium Indian Wells, California. State Tax Restructuring

Transcription

1 IPT 2015 Sales Tax Symposium Indian Wells, California State Tax Restructuring

2 Presenters Scott Norton Executive Director, NTD Indirect Tax Ernst &Young John Schneider Director of Tax Aramark Uniform Services 2

3 Agenda Defining structuring Common reasons for restructuring Business purpose and economic substance Income tax planning Sales tax benefits and considerations Sales tax implications of restructuring Major considerations 3

4 Defining structuring Reorganizing the position of entities ( boxes ) within structure Changing the flow within the boxes Changing transaction characteristics 4

5 Common reasons for restructuring Companies may consider restructuring for the following reasons: Buying or selling significant property (e.g., nonexempt machinery/equipment, aircraft, or motor vehicle fleet) Improve operations and/or compliance Income and/or sales tax benefits Merging, consolidating, or liquidating a portion of their business operations 5

6 Business purpose and economic substance There should be a substantial business purpose, independent of tax benefit, for all restructuring engagements Business purpose/economic substance (dual inquiry) Does the transaction have a purpose, substance, or utility apart from the anticipated tax consequences? Are there objective indicators of the practical economic effects of a transaction, independent of tax benefits? Client must provide the business reasons supporting the restructuring, and they must be reasonable. 6

7 The Risk Continuum: Business Purpose and Economic Substance Business Purpose Low Risk Economic Substance High Risk 7

8 Business purpose and economic substance 8 Ohio Valley Aluminum v. Dept. of Rev., No CA MR (Ky Ct. of App. Sept.2014). Applying the substance over form doctrine, the court held that an aluminum processer, and its subsidiary were, in fact, one entity, and therefore not entitled to exemptions from Kentucky sales and school taxes. Sullivan Brothers Inc. v. Wisconsin Dept. of Rev., No. 2013AP818 (Wis. Ct. App. Jan. 30, 2014). Sales of materials between a contractor and its sister company did not qualify for the state s sale for resale exemption, because the transactions lacked economic substance. Cal. Code Regs. 1699(i). California defines buying company as a legal entity that is separate from another legal entity that owns, controls, or is otherwise related to, the buying company. It is presumed that the buying company is formed for the operational reasons of the entity which owns or controls it or to which it is otherwise related. It is further supported if the company marks-up sales, invoices, or otherwise accounts for the transactions.

9 Business purpose and economic substance 9 Operational benefits Restructuring should be driven by non-sales tax savings motives Control taxability decisions Eliminate the need for calculating and documenting credits for tax paid on stored assets Operational considerations Sales and use tax systems and processes may need to be established and/or updated Additional seat licenses may be required for existing software licenses More complex business structure may require automation of certain tax and/or administrative functions

10 How to demonstrate substance Intercompany agreements Pricing Accounting Invoicing Issuing P.O. s Payments Financial Statements Contracts Vendor Customer 10

11 Income tax structuring Presence in combined reporting, no tax, or single sales factor jurisdiction Sale of goods (cost + x%) Manufacturing Co. Multistate nexus (physical presence) Principal / Entrepreneur / Headquarters Co. Multistate nexus Sale of goods (retail x%) Sales Co. Final Sale of goods Summary: Sales and distribution functions transferred to Sales Co. Centralized headquarters functions retained in Principal / Entrepreneur / Headquarters Co. Manufacturing functions transferred to Manufacturing Co. Buy / Sell on produced or acquired goods Common SALT issues: Nexus containment Sourcing, throwback and right to apportionment Transfer pricing 11 Customer

12 Sales tax structuring: Benefits and considerations Considerations Resale certificates Changes in sales tax permits Registration and licensing formalities Separate business licenses may be required Property registration issues (e.g., motor vehicles) 12

13 Sales tax structuring: Benefits and considerations Container exemptions Most states exempt nonreturnable containers and other packing materials used to ship and transport goods from sales tax. Manufacturing exemptions isolate manufacturing activity 13

14 Sales tax structuring: Benefits and considerations Occasional or casual sales exemptions Broadly worded Timing matters! CA: If a business makes more than two retail sales of tangible personal property during any 12-month period, they are considered a retailer and must collect and remit tax, unless a specific exemption or exception applies. (See Cal. Code Regs. 1595(a)(1)). 14

15 Procurement company for asset purchases 15 Streamline the procurement function for the company and its affiliates by consolidating all procurement functions into a separate procurement entity. Main operational benefits include: Elimination of vendor overpayments Eliminates double taxation on transfers Centralizes tax reporting May defer sales tax payment Potential property tax benefits

16 Re-assign the parent company as the purchase company Before: Parent Co. Vendor Sub 16

17 Re-assign the parent company as the purchase company After: Parent Co. Vendor Sub 17

18 Other benefits Temporary Storage Exemption Inventory temporarily housed within a jurisdiction may be exempt from sales tax Indefinite/Permanent exemptions on purchases of standby parts used in manufacturing Deferral of sales tax on inventory items 18

19 Other benefits Rebates Rebates and discounts may be treated as adjustments to the purchase price. True economic price: Capturing the impact of anticipated rebates and incentives to reduce taxable base. 19

20 Negotiated local incentives 20 Certain taxing jurisdictions are able to offer incentives in proportion to the amount of sales tax allocated to the jurisdiction. Sales or purchases generated by the activities of the Company, centralizing procurement within a single jurisdiction would generate incremental revenues for the jurisdiction. In order to secure these revenues within their borders, local taxing jurisdictions may offer tax incentives ranging from 0.5% to 1.75% to the company in exchange for locating the business within their boundaries.

21 Negotiated local incentives California Available for remote sales and intercompany purchase Proposed legislation (CA SB 533) may repeal existing law prohibiting local governments from entering into incentives agreements, eff. 12/31/2015. Texas Available for remote sales Generally not available for purchases 21

22 Leasing company: Overview Streamline the procurement function for the company and its affiliates by consolidating all procurement functions into a separate procurement entity. The procurement company then leases property to the operating company and affiliates. 22

23 Leasing company: Benefits Benefits Immediate cash flow benefit from deferral of sales tax payments and reduction of sales/use tax overpayments Permanent sales tax reduction on residual value of leased asset (based on economic obsolescence or early termination of lease) 23

24 Trade-In company: Overview 24 Use state trade-in provisions to permanently reduce sales tax base by structuring the sale of used property and the purchase of new property as single, integrated transaction. Structure applies to various industries and operational systems, including: Airlines, Telecom, Utilities, Manufacturing Companies with 1031 program Merging/downsizing/expanding companies Any company buying and selling property

25 Trade-In company: Overview 25 A handful of states have unlimited trade-in provisions (e.g., Missouri) Most states have some limitations Items traded-in must be of like kind or similar character (e.g., Connecticut; see Conn. Gen. Stat (a)(8)(B)). Items traded-in must be resold or held for resale (e.g., Arizona; see Ariz. Admin. Code R )). Only specific items (motor vehicles, repair parts) eligible for trade-in (e.g., Massachusetts; see Mass. Gen. L. 1). No trade-in provisions: CA, MI, NC

26 Risks in sales tax restructuring Creating taxable intercompany sales Reporting under the wrong permit Consider taxable movement of assets Loss of eligibility for tax credits (e.g. Enterprise Zone, etc.) Possible affiliate nexus creation 26

27 Risks in sales tax restructuring States that have recently enacted affiliate nexus provisions: Ohio (HB 64, effective Oct. 1, 2015) Nevada (AB 380, effective Oct. 1, 2015) Michigan (SB 658 and SB 659, effective October 1, 2015) 27

28 Risks in sales tax restructuring Sales tax implications of mergers & acquisitions Sales tax on the transaction itself Successor liability for historic tax liabilities of seller Sales tax on subsequent intra-group transactions among related parties 28

29 Summary: Major considerations in structuring Structure must have economic substance Exemptions Resale certificates Container and temporary storage exemptions Occasional or casual sales Nexus Significant administrative and legal requirements 29

30 30 Examples, but not all ended well

31 Citations 31 Business purpose and economic substance Ohio Valley Aluminum v. Dept. of Rev., No CA MR (Ky Ct. of App. Sept.2014). Sullivan Brothers Inc. v. Wisconsin Dept. of Rev., No. 2013AP818 (Wis. Ct. App. Jan. 30, 2014). Cal. Code Regs. 1699(i)(1). Sales tax structuring: Benefits and considerations Cal. Code Regs. 1595(a)(1) Negotiated local incentives CA Proposed legislation SB 533, eff. 12/31/2015. Trade-In company: Overview Conn. Gen. Stat (a)(8)(B) Ariz. Admin. Code R Mass. Gen. L. 1 Risks in sales tax restructuring Ohio HB 64, effective Oct. 1, Nevada AB 380, effective Oct. 1, Michigan SB 658 and SB 659, effective October 1, 2015.