2017 Year-End State and Local Tax Update Jason Sneeringer, CPA Tax Manager

Transcription

1 2017 Year-End State and Local Tax Update Jason Sneeringer, CPA Tax Manager

2 Agenda Current state and local tax (SALT) atmosphere Nexus Sales & use tax Unclaimed property Property tax Income & Franchise tax Credits & Incentives

3 Polling Question Which industry does your company operate in? Professional services Construction Manufacturing Other

4 Current State and Local Tax Trends Why is this important?

5 Current State and Local Trends Debt and unfunded retirement costs State Medicaid spending Reliance on federal revenue Desire to reduce tax burden on in-state sources, while increasing revenue on others Availability of third party data. Increasing importance of sales factor Moving away from all or nothing. Importance of sales & use taxes.

6 Current SALT Trends (cont.) Increase in products, projects, and/or employees crossing state lines. Services are being performed from locations all over the world. Sales and shipments are moving to other states with little or no advance notice to accounting. Internet sales create complexities With tax reform coming, SALT changes will likely be coming as well.

7 SALT In most companies, tax is a reaction to events that have occurred in the past. Less room for improvement Less room to manage risk Most companies have some sort of strategic, marketing, or federal tax plan very few have a state tax plan or strategy. We want to strive to manage the tax position of our clients instead of allowing it to be created.

8 SALT (cont). The first step is to establish clear indicators that will cause your company to establish nexus in a state. The most common: Employees living in a state Sales people entering a state Performing service in a state Sales level within a state

9 Nexus

10 Nexus Nexus is defined as the minimum connection between the taxing state and the taxpayer/property/transaction in order for the state to tax it. Nexus requires sufficient contact between the state and the business it wants to tax. Nexus standards vary depending on the tax. Possible to have nexus for one tax and not another.

11 Nexus Overview Commerce Clause Due Process Clause Quill Public Law Economic Presence Factor Based Nexus $50,000 property or payroll, $500,000 sales or 25% of company s total property, payroll, or sales.

12 Nexus Current Events Oregon and Colorado economic presence. Factor presence in OH. Oregon Public Law Understand your company s operations and the rules in each of the states you are selling, distributing, producing, or entering in order to evaluate your exposure each year.

13 Nexus Planning & Studies Complexity of nexus across different taxes, taxing jurisdictions, and industries. We can perform a nexus study to evaluate where your company has established nexus. Many times, can be established by sales people without accounting having knowledge. Once known, opportunities to discontinue the nexus creating activity. May be opportunities to create nexus in other jurisdictions. Voluntary disclosure

14 Polling Question My company evaluates nexus on a frequent basis? Yes, we evaluate nexus as new jobs or work arise. Yes, we evaluate nexus at the end of each year. No, we do not evaluate nexus often.

15 Sales & Use Tax

16 Sales & Use Tax 45 states & DC impose sales taxes on retail sales of tangible personal property and/or selected services and a use tax on the use or consumption of those items/services. To add further complexity, a number of state legislatures have granted their cities, towns, or even school districts the power to levy sales taxes. Estimate of different sales tax jurisdictions in the US is nearing 10,000. All states impose sales & use taxes in a complementary fashion. At the local level this isn t necessarily the case. Taxpayers must consider the rate that should be imposed on transactions.

17 Sales & Use Tax (cont.) Important aspects of sales tax Amount subject to tax Percentage applied to compute the tax due The selling price or receipts subject to tax Exclusions or exemptions from the basis of the tax Who s responsible for the tax? Purpose of the tax is one time at the consumer level If a taxable sale, the seller must charge tax or obtain documentation supporting a tax free sale Resale & exemption certificates differ greatly state to state What if the vendor doesn t charge sales tax?

18 Sales & Use Tax (cont.) Issues Items subject to tax Differences typically due to politics and economy of each jurisdiction. Expanding to include services as our economy moves that way. Issue of internet sales and who gets the sales tax origin state or destination state. Price Typically tax is imposed on total sales price Treatment of coupons, rebates, discounts

19 Sales & Use Tax (cont.) Issues (cont.) Nexus Quill Click-through Marketplace Fairness Act Disregarded entities Industries with specific rules Manufacturing Construction Technology software & service agreements

20 Sales & Use Tax Current Events Internet sales Streamlined Sales and Use Tax Agreement Marketplace Fairness Act and Remote Transactions Parity Act. Colorado s out-of-state seller notification law. Most of these are aimed at expanding the tax base to include remote sellers.

21 Sales & Use Tax (cont.) What can we do? Taxability matrices Decision trees Exposure evaluation Nexus studies Registrations Voluntary disclosure agreements

22 Unclaimed Property

23 Unclaimed Property Area states are starting to turn to for additional revenue. Generally property that the owner has not claimed for a period of time. Uncashed payroll or vendor checks Unapplied AR credits Unused gift certificates Customer refunds and rebates Safe deposit boxes Every state and DC have unclaimed or abandoned property laws. Most states treat this as revenue in their budgets.

24 Unclaimed Property (cont.) Delaware Aggressive leader of unclaimed property auditing methods Hiring contract auditors and estimating liability for years without records available. Claiming all of the liability is DE s to collect. Much litigation on this issue to come.

25 Property Tax

26 Property Tax Tends to be largest state and local tax burden. Also tends to be the most overlooked for opportunities to limit or strategically reduce. SN can assist with Verification of asset records or classifications Consulting on appropriate property tax values on tangible personal or real property Evaluation of property tax assessments and challenging those assessments where necessary.

27 Income & Franchise Taxes

28 Income & Franchise Taxes Calculation of state tax is typically as follows: Starting Point Federal Taxable Income +/- State Adjustments = Adjusted State Income X Apportionment % = State Taxable Income X State Tax Rate = State Tax

29 State Adjustments Typical Adjustments Group filing Consolidated returns Combined unitary reporting Related party transactions Intercompany debt vs. Equity Transfer pricing Related party expense add-backs.

30 Related Party Transactions Intercompany debt vs. Equity Transfer pricing Related party expense add-backs.

31 Apportionment Business vs. nonbusiness income apportionable vs. allocable Basic formula 3 factor property, payroll, sales Trend towards increasing sales factor sales only. Formulas can be industry specific Property Factor Typically average cost of property owned plus rented property x 8. Payroll Factor Payroll to in state employees/total

32 Apportionment (cont.) States moving toward single sales factor apportionment Arizona (Election) California Colorado Connecticut Delaware (2020) District of Columbia Georgia Illinois Indiana Iowa Louisiana Maine Michigan Minnesota Missouri (Election) Nebraska New Jersey New York North Carolina Oregon Pennsylvania Rhode Island South Carolina Texas Wisconsin

33 Sales Factor Sourcing Rules what goes where? Sales of tangible personal property Destination Dock sales Throwback rules Sales other than TPP Historically costs of performance Income producing activity is performed in the state; or Income producing activity is performed both inside and outside state.

34 Sales Factor (cont.) Sourcing Rules (cont.) Sales other than TPP (cont.) Focuses on efforts and employees rather than customer location Services typically sourced to a single state. Change toward a service based economy Market based sourcing Allocation of the service revenue to the state in which the benefit of the service is received and will subsequently be used Destination based.

35 Market Based Sourcing Why? More accurate picture of tax base COP outweighs home state sales factor Administrative burdens to determine COP components Throw out rules Differences in state definition of market

36 Polling Question True or False: My company has evaluated market based states for applicability? True False

37 Sourcing of Sales (cont.) Planning for market based sourcing Out of state tax burden will likely increase Could be an opportunity or detriment depending on the home state and market state mix. Need highly sophisticated accounting systems to track costs of performance and markets Potential for cost savings Always should be considering cost/benefit and exposure

38 Income & Franchise Tax What can we do for you? Exposure estimates Apportionment review Accounting system setup Audit defense Mergers & acquisitions Tax planning Corporate restructuring Upcoming state amnesty programs Virginia Ohio

39 Credits & Incentives

40 Credits & Incentives Implemented and used by states and localities for tax policy objectives New business investment Increasing employment Encouraging research and development. Competition between states to attract new business facilities creates great opportunities to present to multiple states/localities Market to sell these credits Nearly every state offers incentives to attract new businesses. Enterprise Zones

41 Conclusion Current state and local tax environment Nexus Sales and use taxes Unclaimed property Property taxes Income & franchise taxes Credits & incentives

42 Questions

43 CONTACT Jason Sneeringer, CPA Tax Manager Tel: (717) Web: