Ohio Tax. Workshop Q. Advanced: Multistate Apportionment Trends, Pitfalls & Opportunities. Tuesday, January 24, p.m. to 4 p.m.

Transcription

1 26th Annual Tuesday & Wednesday, January 24 25, 2017 Hya Regency Columbus, Columbus, Ohio Ohio Tax Workshop Q Advanced: Multistate Apportionment Trends, Pitfalls & Opportunities Tuesday, January 24, p.m. to 4 p.m.

2 Biographical Information Robert M. Woolley, Jr. CPA, MST; Partner, Plante Moran 250 South High Street, Suite 100, Columbus, OH Direct: Fax: Bob began his career in January 1993 in Plante Moran s Ann Arbor, MI office and moved to the Columbus, OH office in December Bob currently is the Director of Tax of the Columbus office and previously led the Ohio Region state and local tax practice. Bob primarily serves clients in both the manufacturing/distribution and service industries. Bob is known for working with his clients to manage their tax risks and exposures by providing them the information they need to make effective and realistic business decisions regarding the tax issues they face. Bob is a regular speaker at both internal and external technical trainings, including the AICPA, the Michigan Tax Conference, the Minnesota CPA Tax Conference, and the Ohio Tax Conference. Bob is a graduate of Michigan State University with a B.A. in Accounting and received a Masters of Science in Tax from Walsh College in Troy, Michigan. Thomas Cornett, Senior Tax Manager, Multistate Tax Services, Deloitte Tax LLP 600 Renaissance Ctr. Detroit, MI tcornett@deloitte.com Tom Cornett is a Senior Manager in the Detroit Multistate Tax Practice. He has 20 years of experience in state and local taxation and has consulted with clients in all aspects of multistate income, franchise, and Michigan business taxes. Tom is Deloitte s State Tax Desk contact for Michigan tax matters and coordinates technical reviews of various state and local tax matters for Deloitte s Washington National Tax group. His client experience includes audit and administrative appeals representation, multistate analysis of business reorganizations, tax provision attestation, and recommendations with respect to multistate savings strategies. Prior to joining Deloitte, Tom spent three years as State Tax Counsel for DaimlerChrysler. Tom received both his undergraduate degree (in Economics and History) and law degree from the University of Michigan. Nicole L. Johnson, Associate, State & Local Tax Group, Morrison & Foerster LLP 250 West 55th St., New York, NY NJohnson@mofo.com Nicole Johnson is an associate in the State + Local Tax Group in Morrison & Foerster LLP s New York office. Her practice focuses on state and local tax controversies at the audit, administrative, and judicial levels. Ms. Johnson s practice encompasses matters regarding sales and use taxes, property taxes, franchise and income taxes, gross receipts taxes, insurance taxes, and telecommunication taxes, among others. Ms. Johnson is admitted to practice in both Minnesota and New York. In addition, she has written and spoken on various state and local tax issues and is a co-editor of the firm s newsletter State + Local Tax Insights. Prior to joining Morrison & Foerster in 2010, Ms. Johnson was a state and local tax manager with one of the big four accounting firms, where she focused on complex state and local tax controversies and planning opportunities. Ms. Johnson graduated cum laude from William Mitchell College of Law and clerked for the Honorable Michael B. Thornton of the United States Tax Court.

3 26 th Annual Ohio Tax Conference (Workshop Q) Multistate Apportionment Trends, Pitfalls & Opportunities January 24, 2017

4 Presenters Tom Cornett Deloitte Tax LLP , Nicole Johnson Morrison & Foerster LLP , Bob Woolley Plante Moran, PLLC , 2

5 Agenda Introduction Sales Factor Weighting and Trends Multistate Tax Compact MTC 3-Factor Litigation Cost of Performance Market-based Sourcing Special Industry Rules Sec.18 Relief & Alternative Apportionment 3

6 Learning objectives Upon completing this course, you will be able to: Discuss the consequences of the trend towards sales factor weighting Identify options for addressing the differences taxpayers may face, given the variations in how states define market to source income Identify industries where the special apportionment rules are being put into place or being modified and certain considerations for taxpayers in those industries 4

7 Introduction

8 Purpose of Apportionment Goal of apportionment is to compute percentage of total profits attributable to a particular state Historical concept is that business profits are function of productive capital (property factor), labor (payroll factor) and market (sales factor) In 21st century business environment, shortcomings of this historical three factor apportionment model include the following: Intangible assets are generally not included in property factor Sales factor has evolved into dominant factor Technology advancements have changed the nature and extent of how capital is used by businesses, meaning they can do more with less property and payroll More service related businesses 6

9 Purpose of Apportionment The United States Supreme Court has recognized "the impracticality of assuming all income can be assigned to a single source." Trinova Corp. v Dept. of Treasury, 498 US 358, 378; 111 S Ct 818; 112 L Ed 2d 884 (1991). A state may not tax value earned outside of its borders; however, businesses operating in interstate commerce are not immune from fairly apportioned state taxation. Mobil Oil Corp. v Commissioner of Taxes of Vermont, 445 US 425, 436; 100 S Ct 1223; 63 L Ed 2d 510 (1980). [T]he linchpin of apportionability in the field of state income taxation is the unitary-business principle." Id. at 439. In order to determine whether separate entities form a unitary business, courts should consider three factors: "(1) functional integration; (2) centralization of management; and (3) economies of scale." Allied- Signal, Inc. v Director, Div. of Taxation, 504 US 768, 781; 112 S Ct 2251; 119 L Ed 2d 533 (1992). 7

10 Sales Factor Weighting and Trends

11 Sales Factor Apportionment Trends Sales factor was traditionally single-weighted or double-weighted in the overall three factor apportionment formula along with payroll and property factors Sales factor is intended to give recognition to importance of customer and benefits afforded to seller by customer s state Trend now is to increase the weight of the sales factor, with many states moving to single sales factor formula Why do you think states are trending to single sales factor? 9

12 Sales Factor Apportionment Trends Replacing cost of performance (COP) rules for sales other than sales of tangible personal property (TPP) with various marketbased sourcing rules Finnigan vs. Joyce Specific state apportionment elections Different factors or different factor weightings Multistate Tax Compact elections 10

13 Multistate Tax Compact/UDITPA Brief History & Update

14 Historical Perspective Sales Factor Per the pre-2014 Multistate Tax Compact (MTC) Article IV apportionment provisions of the Uniform Division of Income for Tax Purposes Act (UDITPA), sales were sourced in the following manner: Tangible personal property (TPP) Destination sourcing Other than TPP (services or intangibles) Cost of Performance Audits and litigation continue across many states regarding the appropriate interpretation of cost of performance rules. States are moving towards market-based sourcing rules 12

15 Historical Perspective Sales Factor Why the trend away from COP and towards market-based sourcing rules for sales of services and intangibles? Market-based sourcing arguably serves the purpose of the sales factor by more accurately reflecting the customer base for taxpayer s services. Costs of performance tends to overweight the sales factor for service providers operating in a state. May be viewed as a disincentive for service providers considering investment in the state. The interpretation of cost of performance rules continues to be a regular source of dispute. 13

16 UDITPA Rewrite At the 2014 Annual Business Meeting of the Multistate Tax Commission, an 81% majority of the member states voted to adopt amendments to the MTC Article IV apportionment provisions of UDITPA in the following areas: Definition of sales Apportionment factor weighting Definition of business income Sales factor sourcing for services and intangibles 14

17 UDITPA Amended Provisions Sales Changed term to Receipts and updated definition to include only those receipts that are received from transactions and activity in the regular course of the taxpayer s trade or business Narrowed the definition of sales to exclude hedging transactions and treasury receipts from the sales factor Factor Weighting recommended that Compact states use doubleweighted sales factor but left autonomy to each state to decide factors Business Income expanded definition to include all amounts that can be classified as all income apportionable under the U.S. Constitution Sales factor sourcing for services and intangibles generally provides for market sourcing instead of the previously-existing cost-ofperformance provisions. For Services where the services is delivered For Intangibles based on use and certain intangible receipts would be thrown out of the numerator and denominator 15

18 Update on MTC 3-Factor Litigation

19 Multistate Tax Compact Litigation Update Compact states that have modified UDITPA or attempted to override UDITPA include: Alabama, Arkansas, California*, Colorado, District of Columbia, Idaho, Michigan*, Minnesota*, North Dakota**, Oregon, Utah, and Texas Compact states that have not modified or attempted to override UDITPA: Alaska, Hawaii, Kansas, Missouri, Montana and New Mexico *California (2012) and Minnesota (2013) have enacted legislation to remove their states from the Compact. Michigan (2014) repealed all Compact provisions of Michigan law, retroactive to January 1, **North Dakota (2015) enacted legislation repealing Article III and IV of UDITPA, though equal-weighted three factor apportionment (and cost of performance sourcing of non tangible personal property receipts) continues to be available otherwise.

20 California Gillette Company, et. Al. v. California Franchise Tax Board, No. S (Cal. 2015) On December 31, 2015, the CA Supreme Court (Court) unanimously reversed the CA Court of Appeal s decision from 2012 and denied the taxpayers election to change their corporation franchise tax apportionment formula to apply provisions of the Multistate Tax Compact ( Compact ). The taxpayers had sought to use the equally weighted, three-factor apportionment formula (property, payroll, sales) available under the Compact Election in lieu of the three-factor formula with double-weighted sales provided in California Revenue & Taxation Code. The Court held that the Compact was not a binding reciprocal agreement among the member states; thus, the CA legislature may eliminate the Compact s election provision. The Court applied a four-factor test derived from Northeast Bancorp v. Board of Governors, FRS, 472 U.S. 159 (1985) : Whether the Compact created reciprocal obligations among the member states, Whether the Compact s effectiveness depended on the conduct of other members, Whether any provision prohibited unilateral member action, and Whether a joint organization had been established to regulate the members US Supreme Court denied cert on October 11, 2016

21 Multistate Tax Compact Litigation Update Minnesota Kimberly-Clark Corporation & Subsidiaries v. Commissioner of Revenue (Minn. Tax Court Docket No R, June ). The Minnesota Tax Court assumed (without deciding) that the Compact was a contract among Minnesota and the other States that adopted it and that the Compact created binding obligations. However, no Compact provision constitutes a clear and unmistakable promise to refrain from using the State s sovereign power to alter the apportionment election provided by Articles III and IV. Thus, the Tax Court held that the Minnesota Legislature s 1987 repeal of Articles III and IV of the Multistate Tax Compact (Compact) was valid and did not substantially impair a binding contractual obligation. Minnesota Supreme Court affirmed decision earlier this year. US Supreme Court denied cert on December 12, 2016

22 Multistate Tax Compact Litigation Update Oregon: Health Net, Inc. and Subsidiaries v. Department of Revenue, (Or. Tax, Sept. 9, 2015.) The Oregon Tax Court held that the Oregon Legislature effectively disabled the ability of taxpayers to make an election under the Multistate Tax Compact to use the equally-weighted three-factor apportionment formula. The Tax Court also ruled that the enactment of Or. Rev. Stat did not violate any procedural or substantive provision of the Oregon Constitution, and did not violate the federal Compact Clause or the federal Contract Clause of the U.S. Constitution. Oral arguments were held before the Oregon Supreme Court on September 19, 2016

23 Multistate Tax Compact Litigation Update Texas: Graphic Packaging Corp. v. Susan Combs. On July 28, 2015, the Texas Court of Appeals held that taxpayer was not entitled to use the Multistate Tax Compact s evenly-weighted, three-factor apportionment formula to compute the Texas Margin Tax. Instead, the Court of Appeals ruled that the taxpayer was required to use the single factor formula in Texas Tax Code section (a). The Texas Supreme Court has not decided whether it will accept Graphic Packaging s petition for review, but has requested briefing on the merits. Graphic Packaging s opening brief was filed on September 30, The Comptroller s brief is due on January 13, 2017 and Graphic Packaging s reply is due on January 30, 2017.

24 Michigan 2014 IBM decision IBM vs. Michigan Dep t of Treasury, No (Mich. Sup. Ct. July 14, 2014) On July 14, 2014, a four justice majority of the Michigan Supreme Court reversed an earlier Michigan Court of Appeals decision and held that the enactment of the MBT did not repeal by implication the Compact election provision provided in Michigan s Revenue Act The Michigan Supreme Court also held that the MGRT element of the MBT fit the Compact s broad definition of an income tax Three member dissent (including the Chief Justice) would have held that repeal by implication did not apply and would have rejected the conclusion of the California Court of Appeal in Gillette that the Compact was a binding interstate compact (based on constitutional and contract law considerations) which a member state could not alter

25 Michigan Retroactive Compact Repeal Legislation and 2015 Gillette decision On September 12, 2014, Michigan Governor Snyder signed Public Act 282 of 2014, which retroactively repealed the entire Multistate Tax Compact section of Michigan s tax laws, effective January 1, On September 29, 2015, the Michigan Court of Appeals in Gillette et. al. upheld PA 282 and rejected Compact-based MBT refund claims in numerous pending cases. The Court held: The taxpayers have no vested interests in the continuance of tax legislation and under United States v. Carlton, 512 U.S. 26 (1994), the period of retroactivity is rationally related to the Legislature s legitimate purpose of protecting state revenues Legislature s stated legislative goal of correcting a perceived misinterpretation of the application of the Compact provisions and preventing significant revenue loss associated with the error was a legitimate purpose. No doubt existed that Michigan legislature acted promptly to correct its error (measured relative to the IBM decision). The six and a half year period of retroactivity was sufficiently modest relative to prior Michigan precedent and other state and federal court decisions. In June 2016, the Michigan Supreme Court denied taxpayer s appeal request. Cert request to US Supreme Court currently pending.

26 Cost of Performance

27 Cost of Performance The General Rule Sales, other than sales of TPP, are in this state if: (a) the income-producing activity is performed in this State; or (b) the income-producing activity is performed both in and outside this State and a greater proportion of the income-producing activity is performed in this State than in any other State, based on costs of performance. (UDITPA, Article IV, Section 17) Costs of Performance Defined No Bright Line Test Taxpayer s costs as determined in a manner consistent with GAAP or the taxpayer s trade or business Common costs include wages, taxes, interest, depreciation, costs of materials consumed, etc. Direct costs versus indirect costs 25

28 Cost of Performance Different Applications The operational approach versus the transactional approach for COP: What is the income-producing activity? What are the direct costs? What opportunities/risks does this present? 26

29 Market-based Sourcing

30 State Recently Changing to Market-Based Sourcing Rules Approximately two dozen states have currently adopted market-based sourcing rules for sales other than of tangible personal property. States that have recently transitioned to market-based rules include: Arizona (elective phase-in ) California (elective in 2011 and 2012, mandatory in 2013) Connecticut (effective 2016 for corporations, 2017 for flow through entities) Louisiana (2016) Massachusetts (2014) Missouri (effective August 28, 2015) Nebraska (2014) New York City (2015) New York State (2015) Pennsylvania (2014) Rhode Island (2015) Tennessee (July 1, 2016) Washington D.C. (2015) 28

31 Discussion Market-based Sourcing Practical Thinking What type of non-tpp sales do you deal with regularly? What s a real life example of a service or intangible-based revenue stream? Reality is that market-based sourcing can be difficult to apply regardless of whether based on location of delivery, client benefit or something else. Based on terms of contract? Location from where request for service is made/ordered? Based on a look through to the client s customer s location? Location from which customer is billed and/or domiciled? What level of analysis and data collection is required by a seller? Consider complex services that appear to benefit an entire organization Where is the benefit received if the customer is a multistate (or multinational) company? Cloud computing services Accounting and legal services 29

32 Market-based Sourcing Cascading Rules One approach to market-based sourcing is to source receipts of services to where the customer receives the benefit of the services performed. There are issues with and different approaches tor identifying where the benefit of the service is received: Generally, the benefit is received at the customer location. Benefits received in more than one state: Individual customers vs. business customers; Order location vs. billing location; Benefit location is indeterminable; or No nexus or fixed place of business in benefit location. 30

33 Cascading rules California Regulation provides the following cascading rules For services: To individual customers Billing address Customer contract or books/records Reasonable approximation To corporation or business entity customers Customer contract or books/records Reasonable approximation Where customer placed order Billing address The state also has cascading rules for transfers and licenses of intangible property 31

34 Market-based Sourcing Cascading Rules There are issues associated with determining where intangibles are utilized: Where utilized by payor (e.g., licensee) Where licensee is located? Where licensee manufactures product? Where licensee sells product? What if location of utilization cannot be determined? What if taxpayer/licensor is not taxable where the intangibles are utilized? 32

35 Market-based Sourcing Scenario Taxpayer owns a subsidiary that operates an online classifieds business advertising the sale of automobiles. Revenue is advertising receipts generated from local car dealerships and national advertisers placing ads. In market-based states, taxpayer has historically sourced revenue to state where the advertiser is located (i.e., local car dealership). Taxpayer recently revised its market-based sourcing approach to the following: When an individual searches for cars online, the individual must enter zip code to begin the search. Presumption is that most people are entering the zip codes of where they reside. Taxpayer collects this data to determine the relative number of searches in each state. In states that measure market-based sourcing on where the benefit is received, this methodology may be more accurate than sourcing based on the location of the advertiser. 33

36 Special Industry Rules

37 Special Industry Apportionment Many states have implemented new or amended apportionment rules applicable to specific industries. Some examples of special apportionment methodologies are: Exclusion of one or more factor(s) Replacement of one or more factor(s) Replacement of standard apportionment factors with industry appropriate factors Special sourcing rules generally based on market sourcing Statutes/regulations/administrative practice 35

38 Financial services industry sourcing rules New York Currently, New York sources deposits to the extent that such deposits are maintained by the taxpayer at the branch location. This is known as the deposits factor and has caused much controversy with regard to determining the location of maintenance and the branch location. New legislation in the state requires the use of market-based sourcing and eliminates the deposits factor for banking corporations for tax years beginning January 1, Under the new law, the following rules are a sample of how receipts from financial transactions may be sourced : Interest on loans secured by real property sourced to location of real property Interest on other loans sourced to location of borrower Net gains from sales of secured loans sourced based on ratio of gross proceeds from sales of NY secured loans over all secured loans Net gains from sales of other loans sourced based on ratio of gross proceeds of such loans to purchasers located in NY to all such loan sales 36

39 Media and entertainment industry Two "market" based methods generally exist for sourcing receipts earned by taxpayers in the media and entertainment industry such as advertising and licensing revenue. Audience Factor Approach looks to where content is viewed Commercial Domicile Approach looks to where the commercial domicile of the advertiser or licensee of the content is located 37

40 Illinois - publishing industry rules The department has adopted a circulation factor to determine when publishing and advertising services are sourced to Illinois for purposes of computing the sales factor. 86 Ill. Admin. Code The circulation factor is the ratio that a taxpayer's in-state circulation to purchasers and subscribers of the published material bears to its total circulation of the published material to purchasers and subscribers everywhere. Computed for each individual publication by the taxpayer of published material containing advertising. Can look to: Geographic information; Books and records; Rating statistics sources (e.g., Audit Bureau of Circulations, etc.) Effective June 5,

41 Sec.18 Relief & Alternative Apportionment

42 (UDITPA) Section 18 If the allocation and apportionment provisions of UDITPA do not fairly represent the extent of the taxpayer s business activity in this state, the taxpayer may petition for, or the state tax administrator may require, with respect to all or any part of the taxpayer s business activity, if reasonable: Separate accounting; The exclusion of any one or more of the factors; The inclusion of one or more additional factors which will fairly represent the taxpayer s business activity in this state; or The employment of any other method to effectuate an equitable allocation and apportionment of the taxpayer s income. 40

43 Alternative Apportionment Most states have a statute allowing for alternative apportionment. Regulations often provide that alternative apportionment may be invoked only in specific cases where unusual fact situations (which ordinarily will be unique and non-recurring) produce incongruous results. Especially common for special industries or intangible income. States may invoke these provisions to achieve market-based sourcing instead of traditional COP. 41

44 Alternative Apportionment Burden of Proof Generally, party seeking to deviate from the standard apportionment formula has the burden of proof. Twentieth Century Fox Film Corp. v. Dept. of Rev., 700 P 2d 1035 (Or. 1985). In theory, must demonstrate formula as a whole does not fairly represent taxpayer s activities in the state. Proposed alternative must be reasonable. What is the effect of deference given to administrative agencies charged with enforcing the tax laws? Income apportioned to the state out of all proportion to activity in the state. 42

45 Alternative Apportionment Burden of Proof (cont.) Question often turns on whether taxpayer can establish distortion the standard apportionment formula results in a distortive sourcing of taxpayer s income to a particular state. Distortion requires a factual demonstration of the unreasonable apportionment percentage in relation to other reasonable benchmarks, such as: Customer location Customer billing address Domestic population What others? Question: What do you need to know to prove distortion? 43

46 Example - 1 Facts: ABC is a service company that is taxable in States Y and Z. Both states use sales-only formulas, and the costs of performance rule. ABC performs all of its income-producing activities in State Y. ABC has $100 million of profits. Sales by location of customer: State Y, 40%; State Z, 35%; Other states, 25%. Questions: What portion of ABC s profits is nowhere income? How would the answer change if State Y used a market-based approach?

47 Example - 1 (cont) Apportioned Income Costs of performance Market-based rule State Y taxable income $100 million x 100% (40%) $100 million $40 million State Z taxable income (using COP) $100 million x 0% Total taxable income $100 million $40 million Nowhere income None $60 million

48 Example 2 - Legal Services During calendar year 2015, an attorney in Michigan represented a client based in California at a trial that took place in New York. The attorney spent time related to the case in each state in the following percentages; MI 60%, NY 30%, and CA 10%. The fees at issue for the tax year are $1,000,000, and were the only receipts for the entire year. Cost of performance would mirror the time spent. Litigation relates to a California location for the client. How do you source the revenue between the three states?

49 Example 2 - Legal Services (cont) MI could seek100%. Assuming all partners are individuals, use COP rules with all or nothing test if Michigan is greater than all other states. CA could seek100%. California sources based on the benefit received of the service and since benefitting a CA client, presume CA would source to that location. NY could seek100%. Beginning in 2015, New York uses a hierarchy of 1. benefit received in the state, 2. delivery destination. Likely argued that benefit received in the state, but likely deemed delivery in the state with trial being held in state. 47

50 Example 3 - Consulting A consulting firm has an engagement in 2015 to perform training sessions for a client solely based in Georgia. For logistical reasons, the sessions will take place in Georgia, Indiana, and Ohio and the cost of performance will mirror the time spent in each state. The time spent by the consultants in each state is OH 80%, IN 15%, and GA 5%. How do you source revenue between the three states? 48

51 Example 3 Consulting (cont) For 2015, IN sources revenue based on COP using time spent for COP. OH and GA are benefit received states. Therefore, the sales factor in each state would be computed as follows on a lone $1,000,000 project for the year: OH - 0/1,000,000 = 0% IN - 150,000/1,000,000 = 15% GA - 1,000,000/1,000,000 = 100% Total amount included in factors is 115% of the total when considering all taxes. OH is zero because the customer is located in and operated from GA, despite the service being performed in OH. 49

52 Example 4 - Software License Facts: HHC is located in Chicago, IL. It has no offices outside of Illinois and its employees do not perform any services outside of IL. It licenses the use of research software throughout the U.S. HHC has two customers, Accountants R Us, LLC (operates in 5 states, including MI) and The Tax Man, Inc. (operates solely in OH) HHC bills its customers based on: Entity user license (Accountants R Us, LLC) Per user license (The Tax Man, Inc.) Issues: What are the income producing activities? How is revenue sourced?

53 Example 4 - Software License (cont) Analysis: What are the income producing activities? Use of intangible property How is revenue sourced? MI - Income received from use of intangible property (including computer software) is attributed to the state in which property is used by the purchaser. If used in more than one state, apportioned pro rata according to portion used in this state. If portion of use in this state cannot be determined, income shall be excluded from both the numerator and denominator. OH - Receipts from the sale, exchange, disposition, or other grant of the right to use trademarks, trade names, patents, copyrights, and similar intellectual property shall be sitused to this state to the extent that the receipts are based on the amount of use of that property in this state. If the receipts are not based on the amount of use of that property, but rather on the right to use the property and the payor has the right to use the property in this state, then the receipts from the sale, exchange, disposition, or other grant of the right to use such property shall be sitused to this state to the extent the receipts are based on the right to use the property in this state.

54 Example 4 - Software License (cont) How do you determine portion used in this state? Accountants R Us, LLC Pro rata based on portion used in state. If cannot get information from company? Allocate amongst 5 states? or exclude from factor? The Tax Man, Inc. Entirely sourced to OH as they are single location For MI, what if you cannot determine and only have one customer, do you have a zero apportionment factor?

55 Example 5 - License of Patent Facts: Inventco, Inc. is located in Detroit, MI. It has no offices outside of MI, but each year its employees perform business activities in one or more jurisdictions outside of MI sufficient to satisfy the CIT nexus standards. It licenses a computer hardware patent to Computers, Inc., a CA based computer manufacturer with computer manufacturing plants in CA and FL. Such computers incorporate the licensed technology. The computers manufactured by Computers, Inc. are sold directly throughout the U.S., including sales to MI customers. Issues: Where does the licensee, Computers, Inc., use the intangible property? How does Inventco, Inc. determine such usage?

56 Example 5 - License of Patent (cont) Analysis A: The use of the patent is entirely outside of Michigan since the licensee has no manufacturing operations in Michigan, and there is no use in the regular course of business in Michigan? Note that use is determined regardless of the location of purchasers of the computers from Computers, Inc.

57 Example 5 - License of Patent (cont) Analysis B: Assume the facts change in year two, and Computers, Inc. opens a manufacturing plant in Michigan at which it produces 30% of its total output of computers in that year. In that year, the license revenue is sourced 30% to Michigan based upon the portion of use of the patent in Michigan.

58 Example 5 - License of Patent (cont) Analysis C: Assume that Computers, Inc. refuses to disclose to Inventco, Inc. the locations at which it manufactures computers using the licensed technology. Does Inventco, Inc. use the default method and exclude royalties from Computers, Inc. from both the numerator and denominator of its apportionment formula? What if Computers, Inc. is the only customer?

59 Example 5 - License of Patent (cont) Analysis D: Assume that one of Computers, Inc. plants is in OH. How do you source receipts to OH? What if you don t know usage between OH plant and other plants? What would change if Computers, Inc. was also headquartered in OH?

60 Example 6 - Call Center Facts: Call Me, Inc. is a call center located in MI that provides technical assistance specialists to handle incoming calls for the customers of Call Me, Inc. s customers. Call Me has several customers in the computer market and logs about 20,000 calls per day. Each call is tracked to determine the customer being supported and from where the call originated. Call Me bills its customers based on the call volume it handles on a monthly basis. None of Call Me s customers are headquartered in MI and all bills are addressed to customer locations outside of MI. Call Me has adequate nexus outside of MI to apportion. Issue: Where does Call Me s customers receive the benefit of the services?

61 Example 6 - Call Center (cont) Analysis: Is benefit received based on the origin of the call? Is benefit received at Call Me, Inc. s customer s location? What if Call Me did not track origin of the call, would that change answer?

62 Example 6 - Call Center (cont) Analysis: Same questions, but Call Me is located in OH Is benefit received based on the origin of the call? Is benefit received at Call Me, Inc. s customer s location? What if Call Me did not track origin of the call, would that change answer?

63 About This Presentation This presentation contains general information only and the respective speakers and their firms are not, by means of this presentation, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This presentation is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. The respective speakers and their firms shall not be responsible for any loss sustained by any person who relies on this presentation. 61