State and Local Tax Update

Transcription

1 State and Local Tax Update State Income Tax & Sales Tax Considerations Unclaimed Property: A Compliance Overview

2 Discussion topics Tax Cuts and Jobs Act effect on state and local taxes Other recent state and local tax developments, including the Wayfair decision Unclaimed property compliance overview

3 Tax Cuts and Jobs Act effect on state and local taxes

4 Tax Cuts & Jobs Act effect on state and local taxes Business tax provision Estimated % change in Federal Corporate Tax Base Expected state conformity Repatriation of foreign earnings +9% Modest conformity 25% or less Interest deduction limitation +6.4% Mostly conformity Global Intangible Low-Taxed Income (GILTI) +5.5% (gross amount) Mostly conformity Modification of NOL deduction +5.3% Most non-conformity Base Erosion Anti-Abuse Tax (BEAT) +4.0% Non-conformity Repeal of DPAD +1.9% Mostly conformity Bonus depreciation -1.8% Modest conformity 100% foreign DRD -5.9% Mostly conformity

5 State responses to TCJA Since the enactment of the TCJA states have been studying the impact of the federal changes to their taxpayers federal and state income tax liabilities, as well as the revenue impact to their own coffers. As of July 25, 2018 seventeen states with static conformity have enacted legislation revising their IRC conformity statutes in response to federal tax reform, but responses have not been uniform. Several states have decoupled from, or issued clarifications on the state tax implications of the federal changes to standard and itemized deductions, personal exemptions, among others.

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7 State Overview of state TCJA conformity Extent of TCJA Conformity Arizona For tax years beginning from and after and through the I.R.C. conformity date is , except it did adopt all provisions of TCJA and other 2017 and 2018 federal tax laws, including the Bipartisan Budget Act of 2018, that are retroactively in effect beginning and after through For tax years after I.R.C. conformity date is without any adoption of TCJA Arkansas Amended Tax-Deferred Tuition Savings Program Act that references 529 to conform to TCJA

8 Overview of state TCJA conformity State Colorado Connecticut Extent of TCJA Conformity Created an income tax credit for employers who contribute to an employee s 529 qualified state tuition program. Enacted legislation in response to TCJA designed to circumvent the limitation on the federal state and local tax deduction. Also decouples from I.R.C. 163(j) interest deductions, 168(k) bonus depreciation 179 expensing election, and created a new pass-through entity tax

9 State Florida Overview of state TCJA conformity Extent of TCJA Conformity Enacted legislation to revise its I.R.C. conformity date to and conforms to TCJA with exceptions. Specifically decouples from bonus depreciation and introduces an automatic downward adjustment to the corporate income tax rate for one year based on actual collections for fiscal year , with excess collections to be refunded to corporate taxpayers Georgia Enacted legislation to revise its I.R.C. conformity date to thus conforming to TCJA and also the Bipartisan Budget Act with exceptions. I.R.C. 118 contributions of capital, 163(j) - interest deductions and 382(k)(1) - loss corporation NOL rules, are treated as if in effect prior to enactment of TCJA.

10 Overview of state TCJA conformity State Hawaii Extent of TCJA Conformity Enacted legislation to revise its I.R.C. conformity date to thus conforming to TCJA and also the Bipartisan Budget Act unless otherwise decoupled. Has decoupled from I.R.C. 91 foreign branch rules, 199A qualified business deduction, GILTI, 267A related party amounts in hybrid transactions, and 274 entertainment expenses. Iowa Enacted legislation to revise its I.R.C. conformity date to for tax years beginning during the 2019 calendar year and to switch to rolling conformity for tax years beginning on or after For tax years beginning on or after and prior to , Iowa continues to conform to the I.R.C as of Iowa legislation also specifically modifies I.R.C. 179

11 State Idaho Illinois Overview of state TCJA conformity Extent of TCJA Conformity For tax years beginning on or after Idaho conforms to the I.R.C. as amended and in effect on , but decoupling from the federal treatment of 245A, GILTI and repatriation tax. However, for tax years beginning on any day of 2017 Idaho conforms to the I.R.C. in effect as of , except for the amendments to 965 and 213 which are applied as in effect on , and many other - including 163 and 199 are applied as in effect on Enacted legislation implementing a budget but not specifically in response to TCJA. Proposed provisions include a charitable-contribution workaround of SALTdeduction cap, a 20 % privilege tax on partnerships and S corporations and modification to the federal GILTI deduction.

12 State Indiana Kentucky Overview of state TCJA conformity Extent of TCJA Conformity Enacted legislation to revise its I.R.C. conformity date to , which includes changes resulting from TCJA and the Bipartisan Budget Act, but decouples from I.R.C. 965, 163(j), 199A, 118 and 250. Enacted legislation to revise its I.R.C. conformity date for purposes of corporate income tax to , thus conforms to TCJA but decouples from 199A. Maryland Enacted legislation to decouple from the elimination of the federal personal exemption for tax years 2018 through 2025.

13 State Michigan Missouri Overview of state TCJA conformity Extent of TCJA Conformity Enacted legislation to revise its I.R.C. conformity date to , which includes changes resulting from TCJA, but decouples from the TCJA treatment of the personal exemption. Enacted legislation decreasing the corporate income tax rate, amending the allocation and apportionment of corporate income provisions, adjusting individual income tax rates, phasing out the federal income tax deduction, modifying the maximum amount for the business income deduction, and eliminating the personal and dependent exemptions if the federal exemption is zero.

14 State North Carolina Nebraska Overview of state TCJA conformity Extent of TCJA Conformity Enacted legislation to revise its I.R.C. conformity date to thus conforming to TCJA and also the Bipartisan Budget Act. However, specifically decouples from or modifies I.R.C. 78, 250, 951, 951A and 965. Enacted legislation to reinstate a personal exemption credit that has been eliminated by TCJA.

15 State New Jersey New York Overview of state TCJA conformity Extent of TCJA Conformity Enacted legislation to allow localities to establish charitable funds to accept donations from taxpayers as a workaround to the SALT cap in TJCA. NJ also enacted legislation 1) to introduce a new surtax on dividends received from subsidiaries 2) making adjustments for I.R.C. 163(j), 199A and 965. NY effectively conforms to the I.R.C. on a rolling basis and therefore conforms to TCJA. However, legislation has been enacted to decouple from numerous provisions including standard and itemized deductions, and to create a number of state modifications, including expanding the definition of exempt CFC income. Also enacted an optional payroll tax and created a charitable contributions credit.

16 State Overview of state TCJA conformity Extent of TCJA Conformity Ohio Oklahoma Enacted legislation updating its conformity for personal income tax purposes to incorporate amendments to federal law since , thus adopting changes in TCJA and the Bipartisan Budget Act unless otherwise decoupled. Notably Ohio continues to decouple from 168(k) bonus depreciation and 179 expensing election. OK generally conforms to the I.R.C. in effect for the relevant tax year and thus conforms to the TCJA change. In addition, OK enacted specific legislation to allow taxpayers to pay the tax on 965 income in installments if that election is made for federal purposes.

17 State Overview of state TCJA conformity Extent of TCJA Conformity Oregon Pennsylvania Rhode Island Enacted legislation to revise its I.R.C. conformity date to for tax years beginning on or after unless explicitly stated otherwise. Oregon thus conforms to TCJA but has enacted legislation decoupling from the federal deemed repatriation rules under I.R.C. 965 and also created a new, limited credit PA has enacted legislation to allow depreciation under I.R.C. 167 and I.R.C. 168 as amended, except for 168(k), and has clarified the disallowance of any for depreciation of qualified property under 168(k) Enacted legislation to decouple from the federal personal exemption. Also issued guidance to clarify state impact of repatriation rules under 965 and federal changes to 179 expensing and bonus depreciation.

18 State Overview of state TCJA conformity Extent of TCJA Conformity South Dakota Tennessee Utah Enacted legislation effective to conform to the I.R.C. as amended and in effect on for its income tax on banks and financial institutions. Enacted legislation to decouple from I.R.C. 163(j) interest deductions and 118 contributions of capital Utah generally conforms to the I.R.C. in effect for the relevant tax year and thus conforms to the TCJA change. In addition, OK enacted specific legislation to allow taxpayers to pay the tax on 965 income in installments if that election is made for federal purposes.

19 Overview of state TCJA conformity State Extent of TCJA Conformity Vermont Virginia West Virginia Enacted legislation to revise its I.R.C. conformity date to for tax years beginning on or after unless otherwise decoupled. Enacted legislation to revise its I.R.C. conformity date to thus conforming to TCJA and also the Bipartisan Budget Act. However, the legislation specifically decouples from most provisions of TCJA that are effective for tax years before Also, the legislation conforms to the Bipartisan Budget Act only for the 2017 year. Revised its I.R.C. conformity date to for corporate and personal income tax purposes and therefore conforms to TCJA unless otherwise decoupled. WV decoupled from the elimination of the personal exemption for tax years beginning on or after The enacted legislation does not conform to changes resulting from the Bipartisan Budget Act of 2018.

20 State Overview of state TCJA conformity Extent of TCJA Conformity Wisconsin Wisconsin revised its conformity date for corporate and personal income tax purposes. For tax years beginning after , Wisconsin conforms to the I.R.C. amended to , with the exclusion of a number of provisions of TCJA including 59A, 199A, 245A, 267A and 951A, and amendments to 250, 168, 451 and 965 among others. For tax years beginning after and before , Wisconsin conforms to the I.R.C. as amended to , not including amendments to the I.R.C. after that date, except for certain TCJA changes relating to 529, 529A and 481. The enacted legislation does not conform to changes resulting from the Bipartisan Budget Act of 2018.

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22 State conformity examples: I.R.C. 163(j) Decoupling from Interest Expense Limitation Connecticut (S.B. 11) Georgia (H.B. 918) Indiana (H.B. 1316) Tennessee (S.B. 2119) Wisconsin (A.B. 259) Mississippi (no conformity due to preexisting law) New Jersey A. 4202P Provides interest limitation will apply on a pro-rata basis to interest paid to both related and unrelated parties, regardless of whether the related parties are subject to the addback law.

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24 State Conformity Examples: I.R.C. 965 Idaho H.B. 463 (enacted 3/12/2018) Applies DRD but disallows IRC 965(c) deduction Oregon S.B (enacted on 4/10/2018) Applies DRD but disallows IRC 965(c) deduction; repeals tax haven provisions and provides a credit for tax previously paid under the state s tax haven regime New York S.B (enacted 4/12/2018) Treats as exempt CFC income but requires an addback of expenses related to such excluded amounts Connecticut S.B. 11 (enacted 05/31/2018) Provides for a 5% attribution of expenses to nontaxable dividends

25 State Conformity Examples: I.R.C. 965 New Jersey A.B (enacted on 07/01/2018) Lowers the DRD from 100% to 95% for privilege periods beginning after December 31, 2016 for dividends received from 80% or more owned subsidiaries For the privilege period beginning in 2017, for purposes of calculating the deemed dividends included by this provision, taxpayers must use either the three year average allocation factor for the taxpayer s 2015 through 2017 tax years or 3.5 percent, whichever is lower The legislation also provides that deductions, exemptions, and credits under IRC 965 are not allowed Rhode Island Proposed regulation asserts that its historic treatment of Subpart F income no longer applies with respect to the one-time repatriation tax under I.R.C. 965 solely because Rhode Island now employs combined reporting for C corporations.

26 Other state issues with federal tax reform Interaction between international, federal and state policies Tax Reform 2.0? Ramifications of decoupling to the states Relevance of IRS guidance to states - 199A?, 965? Timing for additional state guidance Implications for tax haven laws, 80/20 companies, worldwide filers, state modifications Apportionability of foreign income in state tax base I.R.C. 163(j) interest limitation vs. state addbacks Charitable contribution alternatives and other workarounds IRS Notice , Guidance on Certain Payments Made in Exchange for State and Local Tax Credits. Constitutionality of foreign income inclusion

27 OTHER STATE AND LOCAL TAX DEVELOPMENTS

28 Major state legislative changes Apportionment Formula Factor Weighting Utah H.B. 293, signed on March 26, among its provisions would lower corporate and individual income tax rates from 5 percent to 4.95 percent, extend mandatory single sales factor apportionment to more industries in the state, and increase property taxes in the state. Tennessee S.B. 2256, signed on April 9, established an elective single sales factor apportionment method available for financial asset management companies. Virginia H.B. 798, signed on April 9, establishes industry-specific apportionment provisions for buyers of debt, mandating single sales factor apportionment for such taxpayers income from the collection of debt and sourcing that income based on the location of the debtor. Maryland H.B. 1794/S.B The sales factor weight will increase annually, with triple weighting for 2018 tax years, four times weighting for 2019 tax years, five times weighting for 2020 tax years, and six times weighting for 2021 tax years. The measures allow a worldwide headquartered company to elect to apportion its income using a double-weighted sales factor. Maryland H.B / S.B. 538 to implement throwback rule

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30 Major state legislative changes Market Sourcing for Income Tax Apportionment Colorado H.B. 1185, signed on June 4, enacts market-based sourcing for tax years beginning on or after January 1, 2019 on a location of delivery basis. The bill also adopts recent changes to the Multistate Tax Compact s provisions, including definitions of apportionable and nonapportionable income. H.B.1185, however, omits the Compact s sales factor throw-out provisions. New Jersey A Adopts market-based sourcing for services effective for tax years beginning on or after January 1, The legislation deletes the reference to services performed within the State and replaces it with sales of services, if the benefit of the service is received at a location in this State, and provides a hierarchy of sourcing rules. There is no throwout rule. North Carolina S.B. 335, enacted on June 26, is a technical corrections bill that, among its provisions, affirms and maintains the state s current regime for sourcing sales of intangibles for income tax purposes.

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32 Major state legislative changes Mandatory Unitary Combined Reporting Enacted: Kentucky H.B. 366/H.B. 487 New Jersey A Proposed Oklahoma H.B Pennsylvania H.B Maryland S.B. 195 / H.B. 556 S.B. 227 / H.B. 842 limited to retail and food and drink establishments

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34 Major state legislative changes Corporate rate adjustments Missouri H.B. 884 reduces the corporate income tax rate from 6.25 to 4 percent for tax years beginning on or after January 1, 2020 Florida H.B requires the Department of Revenue by October 1, 2019 to calculate the amount of a corporate tax and bank tax rate reduction for the 2019 tax year if corporate tax net collections for the fiscal year exceed forecasted net collections by 7 percent or more. The bill also provides for a refund mechanism for excess corporate tax collections for the fiscal year Georgia H.B. 918 provides for reduced corporate tax rates, from 6% to 5.75% for tax years beginning on or after January 1, 2019, with a potential reduction to 5.5% for tax years beginning on or after January 1, 2020 Idaho H.B. 463 reduces the corporate tax rate from 7.4 percent to percent

35 Major state legislative changes Corporate rate adjustments Utah H.B. 293 among its provisions lowers corporate and individual income tax rates from 5 percent to 4.95 percent, extend mandatory single sales factor apportionment to more industries in the state, and increase property taxes in the state. Iowa S.F reduces each of the state s four corporate income tax rate brackets, with the top rate dropping from 12 percent to 9.8 percent in 2021 Kentucky H.B. 366/H.B. 487 lowers the corporate income tax rate to a flat 5 percent rate New Jersey A Imposes a surtax of 2.5% for corporate taxpayers with allocated net income exceeding $1 million for privilege periods beginning on or after January 1, 2018 through December 31, The surtax is decreased to 1.5% for privilege periods beginning on or after January 1, 2020 through December 31, 2021, and then expires.

36 Major state legislative changes Tax Amnesty Programs Alabama H.B. 137, signed on March 6, will require the Department of Revenue to hold a tax amnesty program for all eligible taxes administered by the DOR, other than motor fuel, motor vehicle, and property taxes, running for a three month period between July 1, 2018 and September 30, 2018 New Jersey A.B. 3438, signed by Governor Phil Murphy (D) on July 1, establishes a 90-day amnesty program in the state to end no later than January 15, The program applies to returns due between February 1, 2009 and September 1, 2017, offers penalty relief and 50 percent interest relief, and applies to most taxes administered by the Division of Taxation Remote Seller / Marketplace Facilitator Amnesties MTC, Indiana

37 Major state legislative changes Sales Tax Holidays 17 in 2018 Already over - Alabama, Florida, Louisiana, Maryland, Mississippi, Tennessee, Texas Now or later Arkansas August 4-5 clothing, school supplies Florida August clothing, school supplies Iowa August clothing Maryland August clothing, backpacks Mississippi August 31-September 2 firearms, ammunition, hunting supplies Missouri August clothing, school supplies, computers, software, graphing calculators New Mexico August clothing, school supplies, computers & hardware, book bags & backpacks, globes, calculators New Mexico November 24 (Saturday after Thanksgiving! But for small business only) Ohio August clothing, school supplies, school instructional materials Oklahoma August clothing South Carolina August clothing, school supplies, computers, bedding and bath items Texas August clothing, school supplies, backpacks Virginia August clothing, school supplies, energy star & generators, chainsaws & accessories, hurricane items Wisconsin August 1-5 first time - clothing, school supplies, computers, school computer supplies

38 The Wayfair decision background information March 22, 2016, South Dakota enacted S.B. 106, which asserts nexus against remote sellers with $100,000 gross revenue from annual sales in the state or 200 separate transactions involving delivery into the state, effective May 1, September 13, 2017, the South Dakota Supreme Court upheld the lower court s holding that S.B. 106 is unconstitutional under Quill and stated that [h]owever persuasive the State s arguments on the merits of revisiting the issue, Quill has not been overruled. Court saw no distinction between the collection obligations invalidated in Quill and those imposed by S.B U.S. Supreme Court granted certiorari on January 12, 2018 (No ). Oral arguments on April 17, 2018.

39 The Wayfair decision what was decided On June 21, 2018 U.S. Supreme Court issued its decision in Wayfair that overturned a physical presence requirement for sales/use tax collection (Bellas Hess (1967) and Quill (1992)) and in its place used an undefined economic and virtual presence test. The Court only addressed the first prong of Compete Auto s (1977) four prong test the prong that requires a taxpayer have substantial nexus with the taxing state before the taxpayer can be subject to a state s tax. South Dakota s $100,000 in sales or 200 transactions held by the Court to be sufficient because the seller availed itself of the substantial privilege of carrying on a business in South Dakota.

40 The Wayfair decision what was not decided The Court did not rule on the constitutionality of other states remote seller collection laws. The Court did not rule on the constitutionality of South Dakota s law; Wayfair case is not final. The Court remanded the case back to South Dakota to address whether some other principle in the Court s Commerce Clause doctrine might invalidate [South Dakota s law]. The Court noted these issues were not litigated or briefed; the Court did not resolve them. It is likely the South Dakota Supreme Court will remand the case back to the State s district court to address any other potential commerce clause issues (e.g., fair apportionment, discrimination, etc.).

41 The Wayfair decision guidance from court decision South Dakota s tax system includes several features that appear designed to prevent discrimination against or undue burdens upon interstate commerce. First, the Act applies a safe harbor to those who transact only limited business in South Dakota. Second, the Act ensures that no obligation to remit the sales tax may be applied retroactively. S. B Third, South Dakota is one of more than 20 States that have adopted the Streamlined Sales and Use Tax Agreement. This system standardizes taxes to reduce administrative and compliance costs; It requires a single, state level tax administration, uniform definitions of products and services, simplified tax rate structures, and other uniform rules. It also provides sellers access to sales tax administration software paid for by the State. Sellers who choose to use such software are immune from audit liability.

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44 The Wayfair decision what s next More states will likely look to enact some form of economic nexus NOT likely to be retroactive Will need to be in compliance with other aspects of the Commerce Clause Might follow the SD thresholds - $100,000 in sales or 200 transactions Illinois has already done this!

45 The Wayfair decision what s happened 2018 Marketplace Facilitator/Provider Bills Enacted: Oklahoma (H.B. 1019) Kentucky (H.B. 366 / H.B. 487) Iowa (S.F. 2417) Connecticut (S.B. 417) Alabama (H.B. 470) (permitting participation in Simplified Sellers Use Tax Program by marketplace facilitators) Proposed: New York (Initially included in Governor s budget proposal) New Jersey (A.B / S.B / A.B. 4206) Kansas (H.B. 2756) New Mexico (H.B. 198)

46 The Wayfair decision what to do now? Review current status of multistate business Sales tax statutes in those states Current sales tax collections Use of third party marketplaces Amazon, ebay Click through arrangements Where do employees and sales reps visit Exemption certificates Nexus studies

47 Contact Information: Bryanna Fredericks Barry Groebel

48 Unclaimed Property: A Compliance Overview James O. Santivañez

49 Reporting Basics Where to Report? Priority Rules/Texas v. New Jersey Holder Domicile: The holder s state of incorporation or organization Last Known Address: The location of the owner of unclaimed property as reflected on the holder s records; often meaning sufficient for the purposes of the delivery of mail. All states and the District of Columbia, Virgin Islands, Guam and Puerto Rico have UP Laws Several Provinces in Canada Now Mandate Unclaimed Property Compliance Foreign Address Property

50 Reporting Basics What Property is Reportable? Abandoned Intangible Property; the Presumption of Abandonment Monetary & other assets such as bank accounts, refunds, uncashed checks, securities, and credit balances When to Report? Varies by State Typically Fall & Spring Why Report? It s the Law Avoid Penalty and Interest

51 Typical Dormancy Periods Depends on the Property Type and the State Some states allow deductions and others exempt certain property types completely Typical Dormancy Periods: Payroll/Commissions MS01 1 Year Accounts Payable MS Years Accounts Receivable MS Years Utility Refunds/Rebates UT Years Capital Credit Distributions UT Years Recent Activity Includes Numerous States Reducing Dormancy Periods In Order To Close Budget Gaps

52 Compliance Visual Verify that all unclaimed property is captured Thoroughness is important Must review data from entire company; where cash comes in to your organization and where cash goes out Once reviewed, you must determine: Due Date Dormancy Period Exemptions/Deductions Accounts Payable Capital Credits Payroll Unclaimed Property Report

53 Report Quantification Determining Your Liability: Know the law: how far are we to look back? What records/documents will we need? Corporate structure Chart of accounts & Trial balances Systems/ERP history Prior UP reporting/audit activity O/S Check listings from all disbursement accounts Accounts receivable aging reports Journal entries of amounts written-off Description of third party administered programs Mergers/Acquisitions

54 Compliance When You Do Nothing P&I Example: Failure to remit the required report: Penalty: 25% of property value for failure to deliver property Willful non-compliance: A person who willfully fails to report is guilty of a misdemeanor (refusal to deliver property is a gross misdemeanor) Maximum of $1,000 fine, maximum of 6 months in prison, or both P&I varies by State Many states offer holders the option to enter into a Voluntary Disclosure Agreement (VDA)

55 Thank you! James O. Santivañez (678) (404)