Tom Cornett, Deloitte Tax LLP Oct 31, 2015

Transcription

1 Recent Developments in State and Local Tax DRAFT FOR DISCUSSION PURPOSES ONLY Tom Cornett, Deloitte Tax LLP Oct 31, 2015

2 Agenda Proposed Federal Legislation Trends in State Income Tax Economic Presence Nexus Trends in State Income Tax Market-based Sourcing Multistate Tax Compact Litigation Update Trends in Sales/use Tax Nexus Recent State Tax Legislative Developments Other Notable Trends and Developments 2

3 Recently Enacted Federal Legislation Which Impacts State and Local Tax

4 Internet Tax Freedom Act On September 30, 2015, President Obama signed H.R. 719, which includes provisions extending the Internet Tax Freedom Act (ITFA) through December 11, ITFA was scheduled to expire October 1, Originally enacted in 1998, the ITFA created a moratorium preventing state and local governments from taxing internet access notably on the monthly payments that consumers make to an internet service provider in exchange for access to the internet. Moratorium has now been extended now five times Fees associated with digital subscriber lines are included under the current moratorium while fees for Voice over Internet Protocol (VOIP) services are not. Seven states (down from 13 under original 1998 moratorium) are permitted to tax internet access pursuant to ITFA grandfather clause. Options before Congress relative to the post December 11, 2015 period include enactment of further temporary extensions, permanent legislation or simply allowing the moratorium to expire. 4

5 Proposed Federal Legislation

6 Proposed Federal Legislation On March 10, 2015, the Marketplace Fairness Act of 2015 (S. 698) was introduced in the Senate. If adopted, MFA 2015, which is substantially similar to the Marketplace Fairness Act of 2013, would authorize Streamlined Sales and Use Tax Agreement member states to enact laws requiring remote sellers to collect and remit sales and use taxes with respect to remote sales. The US House of Representatives Judiciary Committee recently voted to approve three federal bills concerning state taxes: the Mobile Workforce State Income Tax Simplification Act of 2015 (HR 2315), the Business Activity Tax Simplification Act of 2015 (HR 2584), and the Digital Goods and Services Tax Fairness Act of 2015 (HR 1643). The House Judiciary Committee s approval paves the way for a potential floor vote on the Bills in the House, which could lead to a federally imposed standard in the following areas: Nonresident employee withholding taxes, pursuant to HR 2315 State and local income tax nexus, pursuant to HR 2584 Sales and use tax consequences of sales of digital goods and digital services, pursuant to HR

7 Trends in State Income Tax - Economic Presence Nexus

8 Economic Presence Nexus A growing number of states have statutes or rulings that assert nexus over taxpayers that have an economic presence in the state, even those that lack a physical presence in the state. Geoffrey Nexus Geoffrey nexus applies when licensed intellectual property is used in a state. (Geoffrey, Inc. v. South Carolina Tax Commission 437 S.E. 2d 13, cert. den. 114 S.Ct. 550 (1993)). Maine s explanation of economic nexus Economic nexus is a short-hand term for the principle that a taxpayer's purposefully directed business activity in a State (other than solicitation of sales activity protected by P.L ) may be sufficient to subject that taxpayer to income tax in that State regardless of the level or absence of physical presence in that State Michigan active solicitation 8

9 Economic Presence Nexus Lanco, Inc. v. Director, New Jersey Division of Taxation, 188 N.J. 380 (2006), cert. den. 551 U.S (2007) Licensing intangibles creates nexus for New Jersey Corporate Business Tax purposes Quill only applies to sales tax Tax Commissioner of the State of West Virginia v. MBNA America Bank, 220 W. Va. 163 (2006) Adopted significant economic presence test Bank had engaged in continuous direct mail, telephone solicitation, and promotion in state Court ruled that Quill only applies to sales and use taxes, not to state business franchise tax 9

10 Economic Presence Nexus 2010 Iowa Supreme Court Decision Out-of-state company owned all the intellectual property of taxpayer and licensed this intellectual property to non-affiliated restaurant franchisees nationwide IA Supreme Court ruled that the out-of-state company had corporate income tax nexus with Iowa even though it lacked an in-state physical presence 2009 Massachusetts Supreme Court Decision MA state corporate excise tax was imposed on royalties earned by an outof-state trademark company under a licensing agreement that based the royalties on in-state affiliate retailers sales. U.S. Supreme Court denied review in all four of these cases 10

11 Factor-based Nexus Standards Under a bright-line factor-based standard, nexus is created with a state when a minimum amount of property, payroll or sales in the state is met. States adopting Bright-Line Nexus Tests Alabama (2015) California Colorado Connecticut New York State (2015) Ohio Virginia Tennessee (2016) Washington (B&O Tax) Multistate Tax Commission Model Factor Nexus Statute Substantial nexus is established if any of the following thresholds are exceeded during the tax period: $50,000 of property; or $50,000 of payroll; or $500,000 of sales; or 25% of total property, total payroll or total sales. Is a pure sales-based nexus threshold constitutional? Consider due process cases involving goods put into stream of commerce. 11

12 Nexus Re-Fresh When was the last time nexus was analyzed? Do the Company s state nexus positions still make sense given its operations and the evolving laws of the states in which it operates? Is there a difference in where the Company files for sales/use tax and income tax purposes? Does the Company file sales/use tax and income tax returns in all of the states in which its employees visit? Has the Company modified its distribution channels? Has the Company restructured/expanded its sales force? Have there been any mergers/acquisitions/dispositions? Did the Company migrate its intellectual property? Does significant customers/revenue relate to states where the Company does not file? Permanent establishment versus state tax nexus 12 12

13 Trends in State Income Tax - Market-based Sourcing

14 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) Massachusetts (2014) Missouri (effective August 28, 2015) Nebraska (2014) New York City (2015) New York State (2015) Pennsylvania (2014) Rhode Island (2014) Tennessee (July 1, 2016) Washington D.C. (2015) 14 14

15 What Is Market-based Sourcing States approaches to interpreting the market can vary Market for Services Customer location Where the benefit of the service is received by customer Where the service is received Where the service is delivered Market for Intangibles Where the intangible is used Where the intangible has a business situs Where the intangible is domiciled Look-through approach Based on location of the customer s customer 15

16 Market-based Sourcing Practical Issues Reality is that market 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 Look-through approach Sourcing receipts based on the location of the customer s customer States have adopted this approach either through regulation or enforcement efforts California applies such an approach to mutual fund service providers (Cal. Code Regs. tit. 18, ) Such an approach may lead to a large compliance burden for taxpayer s because they may not control the data necessary to accurately source the receipts Regulation may be subject to constitutional challenge and may exceed the scope of the statute 16

17 Cost of Performance Equals Market-Based? Effective market-based sourcing from perceived cost of performance guidance/rulings Indiana Letter of Findings No , Indiana Department of Revenue, September 25, 2013 Indiana held that the taxpayer did not earn revenue from conducting outof-state financial research The taxpayer earned revenue because it conducted financial research and then sold the results of that research to Indiana customers 16 17

18 Cost of Performance Equals Market-Based? Effective market-based sourcing from perceived cost of performance guidance/rulings (continued) Florida Recent Florida Department of Revenue ( DOR ) rulings may suggest a policy shift from a greater cost of performance methodology to an essentially market-based sourcing methodology regarding sales factor sourcing for sales of other than tangible personal property. While these rulings are not citable as precedent and are not binding on the DOR other than with respect to the applicable taxpayers, the rulings may suggest how the DOR would interpret similar factual scenarios presented by other taxpayers. Pennsylvania Market-based sourcing for service revenue was enacted in 2013 effective for tax years starting January 1, The PA amendment may be a codification of the Pennsylvania Department of Revenue s policy to date that income producing activity (under prior statutory language) for many services was deemed to be the customers acceptance or usage. 18

19 Multistate Tax Compact Litigation Update

20 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

21 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 On November 14, the Michigan Supreme Court denied Treasury s motion for rehearing. 21

22 Michigan Retroactive Compact Repeal Legislation 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, the Michigan Court of Appeals upheld PA 282 and rejected Compact-based MBT refund claims in numerous pending cases. The Court held: The Compact was merely advisory and not a binding contract under federal compact law or Michigan law. 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 Characterized Michigan's active membership in the Multistate Tax Commission since January 1, 2008 as irrelevant. Anticipated that taxpayers will seek leave to appeal to the Michigan Supreme Court 22

23 Multistate Tax Compact Litigation Update California: California Supreme Court granted the FTB s petition for review of the Gillette decision from the California Court of Appeal. FTB and Gillette filed briefs on January 22, 2014 and oral arguments were held on October 6th. (The Gillette Company, et al. v. California Franchise Tax Board, 2013 Cal. (Jan 16, 2013), petition for review granted). Texas: 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). Oregon: On September 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. 23

24 Recent Minnesota Tax Court Decision In Kimberly-Clark Corporation & Subsidiaries v. Commissioner of Revenue (Minn. Tax Court Docket No R, June ), the Minnesota Tax Court (Tax Court) determined 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. In its decision, the Tax Court noted a number of factors and concepts relevant to determining whether binding contractual obligations arising from the Compact were impaired, including: - Initially assuming (without deciding) that the Compact was a contract among Minnesota and the other States that adopted it and that the Compact created binding obligations. - The rule of contract construction requiring that government contracts must be strictly construed against the relinquishment of sovereign powers, known as the unmistakability doctrine [,] applies to interstate compacts, including the Compact.. 24

25 Recent Minnesota Tax Court Decision (cont d.) - In the absence of language in the Compact clearly surrendering sovereign power to alter the apportionment election, extrinsic evidence, such as the Compact s history and the member states course of performance, may be considered. - The question of whether the drafters of the Compact would have considered an agreement surrendering the States sovereign taxing powers in order to achieve increased uniformity. Taking into account these and other relevant considerations, the Tax Court concluded that 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. Therefore, the court held that the taxpayer could not elect to compute their Minnesota corporate income tax liability pursuant to the Compact election. The taxpayer has sought leave to appeal to the Minnesota Supreme Court.. 25

26 Trends in Sales/Use Tax Nexus

27 Click-Through and Affiliate Nexus To date, nexus for use tax collection purposes has required in-state physical presence. States have been passing various nexus laws requiring tax collection and filing responsibilities that push the boundaries of the concept of physical presence in a state. Examples include Independent contractor/agency nexus Click-through nexus and related compensated solicitation/referral arrangements (approximately fifteen states currently) Affiliate nexus (approximately twenty states currently) Specific notification and/or reporting requirements exist in a handful of states as well (e.g., CO and associated DMA litigation) 27

28 Affiliate Nexus Sales and use tax nexus considerations have traditionally been analyzed on a separate entity basis. Affiliate statutes generally look to the activities performed by an in-state affiliate which help related entities to establish and maintain a market in that state. Examples include: Use of common logos and trademarks In-state distribution centers from which delivery occurs In-state affiliate s promotion of the out-of-state affiliate s goods or services. 28

29 Click-Through Nexus New York State enacted the first click-through nexus statute in 2008 Seller is presumed to have nexus through an independent contractor or representative if the seller enters into an agreement with a resident where the resident - For a commission or other consideration, the resident Directly or indirectly refers potential customers to the seller Whether by a link on an internet website or otherwise If the cumulative gross receipts from sales from residents with this type of an agreement exceeds $10,000 in the preceding 4 quarter period 29

30 U.S. Supreme Court Update (March 3, 2015) In Direct Marketing Assoc n v. Brohl, 575 U.S. (2015), Justice Kennedy made statements in his concurrence indicating Quill is ripe for reconsideration and could possibly be overturned: Given changes in technology and consumer sophistication, it is unwise to delay any longer a reconsideration of the Court s holding in Quill. A case questionable even when decided, Quill now harms States to a degree far greater than could have been anticipated earlier. The instant case does not raise this issue in a manner appropriate for the Court to address it. It does provide, however, the means to note the importance of reconsidering doubtful authority. The legal system should find an appropriate case for this court to reexamine Quill and Bellas Hess. 30

31 Recent State Tax Legislative Developments

32 North Carolina On August 6, 2015, the Secretary of Revenue announced that North Carolina had met the net General Fund tax revenue target for fiscal year ending June 30, 2015, and thus a 4 percent corporate income tax rate will apply for taxable years beginning on or after January 1, On September 18, 2015, Governor Pat McCrory signed House Bill 97 (H.B. 97), which includes the following modifications to North Carolina law: Amends mechanism for potential future corporate income tax rate reduction from 4 percent to 3 percent Phases in single sales factor apportionment over three years beginning in 2016, replacing the existing double-weighted sales factor apportionment for both income and franchise tax Requires certain corporate taxpayers to file a market-based sales factor sourcing informational report with the North Carolina corporate income tax return for the 2015 taxable year Adds an intercompany interest expense addback provision with corresponding exceptions Replaces the capital stock, surplus, and undivided profits element of the franchise tax capital base with an apportioned net worth tax measure Expands the sales and use tax base to include repair, maintenance, and installation services 32

33 Alabama Governor Robert Bentley recently signed into law a bill implementing a factorbased presence nexus standard effective for tax years beginning after December 31, Substantial nexus will exist with AL for income tax, business privilege tax and financial institution excise tax purposes when the property, payroll, or sales exceed the following bright line thresholds in any tax period: 1. $50,000 in property; 2. $50,000 of payroll; ,000 of sales; or percent of total property, payroll, sales. This new law also addresses the implications of PL and state throwback rules. 33

34 New Hampshire Governor Hassan recently signed SB 9, reducing both business profits and enterprise taxes by.3% for periods ending on or after Dec 31, If specific combined unrestricted general and education trust fund revenue collection levels for the biennium ending June 30, 2017 are met, such taxes would be further reduced for the following period. 34

35 Ohio Municipal Tax Reform H.B. 5 was signed by Ohio Governor Kasich on December 19, 2014, which creates uniform provisions applicable to Ohio municipal tax regimes. Effective January 1, 2016 The bill addresses specific nuances in general income tax calculation and filing procedures among the municipalities Pass-through entity taxation Net profits tax imposed at the entity level. Under H.B. 5, income may continue to be taxed when passed through to resident individual owners. Net operating loss carryforwards Currently, 260 municipalities do not allow NOL carryforwards. Under H.B. 5, for jurisdictions not currently permitting NOL carryforwards, the amount of NOLs incurred for taxable years beginning after 2016 may be deducted to offset up to 50% of income generated in taxable years beginning in 2018 to 2022, and up to 100% thereafter 35

36 Ohio Municipal Tax Reform Due dates, minimum payment threshold, estimated tax and statute of limitations uniformity H.B. 5 establishes uniformity by requiring annual municipal income tax returns due three and a half months after the close of the taxable year Six month extension available Automatic federal extension is treated as automatic municipal extension Minimum payment threshold of $10 for municipal jurisdiction tax remittances Similarly, municipalities are not required to issue refunds of less than $10 Minimum remittance requirement does not negate municipal filing requirement Estimated taxes collected by municipalities from taxpayers whose estimated tax liability is greater than $200 safe-harbor provision that negates application of an underpayment of estimated tax penalty if a taxpayer remitted 90% of the current year tax in accordance with the estimated payment dates Uniform 3-year statute of limitations period that applies absent issues of fraud, a failure to file returns or significant reportable income omission 36

37 Ohio Municipal Tax Reform For jurisdictions that do currently allow NOL carryforwards, the NOLs accumulated for periods prior to 2017 will be treated as deducted first and without the 50% limitation during the phase-in period. Consolidated corporate returns Default filing methodology follows the federal consolidated income tax treatment. If a consolidated municipal return is filed, the election is treated as a binding election to file consolidated for the following five years. Automatically renewed until permission is received to de-consolidate or a new election to file separately is made after the final consolidated year. Requests to terminate the election are also binding for five years Tax administrator may still require a consolidated return Option available to include or exclude 80% or more owned pass-through entity s income/apportionment factors; if less than 80%, always excluded. If excluded, pass-through entity may still be subject to tax at entity level 37

38 Connecticut Connecticut Tax Reform (HB 7061 and SB 1502) On June 30, 2015, key changes effecting the Corporate Business Tax were enacted most notably the adoption of mandatory Unitary Taxation effective January 1, The Connecticut combined group consists of all entities with common ownership (more than 50% direct or indirect), that are engaged in a unitary business. CT unitary group members with nexus in Connecticut are taxable members. - The CT unitary group income is the aggregate income of every taxable and nontaxable member of the CT unitary group as reported on a federal return if each member was filing a separate federal return. - The default CT unitary group uses a water s-edge basis. Optional elections are available for filing on a federal affiliated group basis or a worldwide unitary basis. The affiliated election and worldwide unitary election are only available if made on an originally filed return and are then effective for the next 10 years. - Tax credits earned in an income year beginning on or after January 1, 2016, may be shared with other members of the CT unitary group, if such other members were members during the year the tax credits were earned. - Tax credits carried forward from an income year beginning prior to January 1, 2016, may be shared with other entities that were included in the same combined return in the year the tax credit was earned. 38

39 Connecticut Connecticut Tax Reform (HB 7061 and SB 1502) Other changes effecting the Corporate Business Tax: Deduction of Net Operating Losses (NOLs) is limited to 50% of the amount due effective January 1, NOL carryforwards from 2016 and beyond can be shared with other members if the other members were members of the group in the year that the NOL was generated. NOL from years prior to 2016 that were earned by a separate company would be available to that separate entity on a Separate Return Limitation year basis. 39

40 Tennessee Governor Haslam signed into law the Revenue Modernization Act (H.B. 0644) on May 20, 2014 which enacting broad changes to the Tennessee Franchise and Excise Tax. The enacted changes will be effective for all tax years beginning on or after January 1, Substantial nexus - broadened to include a bright-line presence threshold based on meeting a specific threshold of TN sales, payroll or property. Apportionment - cost-of-performance method for sourcing sales other than the sales of tangible personal property is replaced with a market-based sourcing approach. Receipts from sales, other than from the sale of tangible personal property, are in the state if and to the extent the taxpayer s market for the sale is in the state. Double-weighted sales factor formula replaced with a triple-weighted sales factor - Numerator is the property factor, plus payroll factor, plus three times the receipts factor. - Denominator is five 40

41 Tennessee Intangible Expense Deduction: Current law provides a deduction for intangible expenses paid to an affiliate if either a safe harbor exception is met or if an application to take the deduction is approved. The Act eliminates the application process and revises the safe harbor provision. Effective July 1, 2016, intangible expenses may be deducted if the expense is disclosed and: - The affiliate to whom the expense has been paid is registered for and paying the tax imposed by this part; or - The expense was paid to an affiliate in a foreign nation that has a tax treaty with the U.S. or to an affiliate that is otherwise not required to be registered for or to pay the tax imposed by this part. 41

42 Nevada Commerce Tax On June 10, 2015 Governor Sandoval signed Senate Bill 483, enacting a new commerce tax (effective July 1, 2015) applicable to each business entity engaged in business in Nevada with Nevada-sitused gross revenue exceeding $4,000,000 in a taxable year. Business entity is defined to include the following: - Corporation, Partnership, Proprietorship, limited-liability company, business association, joint venture, limited-liability partnership, business trust, professional association, joint stock company, holding company and any other person engaged in business. The tax is due annually within 45 days of the end of the taxable year, which is defined as the 12-month period beginning on July 1 and ending on June 30 of the following year. The bill authorizes the Department to grant a 30-day extension for good cause upon written application. Therefore, the due date appears to be August 14 th for all business entities, within an extension potentially available to September 13 th. 42

43 Nevada Commerce Tax Tax would be imposed on Nevada gross revenue which is determined starting with the total gross revenue of the business entity, making certain permitted deductions, and apportioning the resulting amount based on the applicable sourcing rules. The total adjusted gross revenue would be sitused to Nevada based on the applicable sourcing provisions, which generally provide for market-based sourcing. On the initial return, the entity is required to designate the business category in which it is primarily engaged. Once made, the determination cannot be changed unless the business applies to the Nevada DOR to change the designation subject to Nevada DOR approval. 43

44 Nevada Commerce Tax Other considerations - Each business entity engaging in a business in Nevada during a taxable year is required to file a return. - The tax therefore applies on a separate entity basis, and since the term business entity is defined to include entities that might be disregarded for federal income tax purposes (e.g. single member limited liability companies), taxpayers should consider the number of separate returns that they may be required to file as a result of their entity structure. - The legislation defines taxable year as the 12-month period beginning on July 1 and ending on June of the following year and that the business entity s method of accounting for gross revenue for a taxable year for the purposes of determining the amount of the commerce tax owed by the business entity must the same as the business s method of accounting for federal income tax purposes - As such, the law appears to require taxpayers to compute Nevada gross revenue on a July 1 June 30 fiscal year, regardless of what the business entity s tax year is for federal income tax purposes. 44

45 Nevada Commerce Tax Other considerations - For purposes of determining the applicable rate, if a business entity is engaged in business in more than one business category, the business entity is deemed to be primarily engaged in the business category in which the highest percentage of its Nevada gross revenue is generated. - Nevada gross revenue means the gross revenue attributable to Nevada under the relevant sourcing provisions. Taxpayers with gross revenue potentially falling into multiple business categories will need to consider the highest percentage of gross revenue attributable to Nevada, rather than the highest percentage of gross revenue overall. 45

46 New York State Key changes concerning the Corporate Franchise Tax taking effect January 1, 2015 Merges the Banking Corporation Tax (Article 32) into the Corporate Franchise Tax (Article 9-A) Adopts full waters-edge combined reporting More than 50% ownership test in place of the previous 80% test Elimination of the substantial inter-corporate transaction test and the distortion test Adopts customer sourcing rules for single receipts factor Generally adopts a customer location methodology Adopts a bright-line economic nexus standard for corporations with sales of $1M or more to NY Customers Eliminates the subsidiary capital provisions NOL provisions changed from pre-apportionment to post-apportionment Provides a 3-year carryback for NOLs incurred in post-reform taxable years 46

47 New York State Looking Ahead Effective for taxable years beginning on or after January 1, 2016, the corporate franchise tax rate on net income is reduced to 6.5% from the previous 7.1% rate. 47

48 New York City Corporate Tax Reform On April 13, 2015, New York s Governor Andrew Cuomo signed S4610A/A6721A into law. This legislation enacts broad-based tax reform of the New York City corporate tax regime that is generally consistent with the New York State tax reform provisions effective for tax years beginning on or after January 1, Compared to New York State s Corporate tax reforms, New York City s corporate tax reform does not contain: - An income tax rate reduction for all corporate taxpayers; - A reduction and ultimate elimination of the alternative tax base on capital; - Adopt bright-line economic nexus thresholds, except for corporations that issue credit cards; - Modify New York City s unincorporated business tax ( UBT ) nor apply to federal subchapter S corporations or; subchapter S subsidiaries, which will continue to be taxed in accordance with the currently-applicable, prereform provisions. 48

49 New York City Corporate Tax Reform The more significant changes, which are effective for tax years beginning on or after January 1, 2015, to New York City s corporate tax structure include the following: - Adopting general customer-based (market) sourcing of receipts and specific sourcing rules for digital products and financial service receipts. - Adopting full water s-edge unitary combined reporting with a greater than 50% ownership test and an election to permit combined filing for certain commonly owned groups with a seven-year lock-in period. - Adopting a limited economic nexus concept. - Reducing the rate from 8.85% to 6.5% for qualifying non-manufacturers with less than $1 million of allocated business income. - Reducing the rate from 8.85% to 4.425% for qualifying manufacturers with less than $10 million of allocated business income. - Retaining the alternative tax base on capital and increasing the tax cap from $1 million to $10 million. 49

50 New York City Corporate Tax Reform Changing the net operating loss ( NOL ) provisions from a preapportioned to a post-apportioned computation. - Ending the requirement that New York City NOL usage be limited to the corresponding amount of federal NOL usage. - Providing transition rules for converting NOL deductions from pre-tax reform years for use in subsequent tax years. Providing a three-year carryback for NOLs incurred in post-reform taxable years, provided that no NOL can be carried back to a taxable year beginning before January 1, 2015 (the carryforward period remains at 20 years). 50

51 Louisiana On June 19, 2015, Governor Jindal signed four bills, enacting various modifications to Louisiana tax law, Key changes concerning the Corporate Business Tax: Net Operating Losses: Eliminate three-year Net Operating Loss (NOL) carryback. Change NOL carryforward from 15 to 20 years. Repeal previously allowed refunds and prescription periods related to NOL carryback claims. Limit NOL utilization to 72 percent of the aggregate NOL carryover amount. 51

52 Michigan PA 266 of CIT Act amended to define an affiliated group and permit a 10 year election for affiliated group to file as a UBG. (Effective for tax years beginning after December 31, 2012.) PA 3 of year SOL tolling provision that existed under prior law repealed. 4 year SOL is now extended for duration of an audit/appeal that extends beyond 4 year SOL. See MCL Section a(3)(a). o Amended statutory provisions only reference audits commenced after September 30, 2014 as extending the SOL. No statutory reference to audits commenced prior to that date. o Letter Ruling outlines Treasury s interpretation of the amended SOL provisions in MCL Section a(3)(a). Pre-amendment tolling provisions continue to apply to audits commenced prior to the February 6 th, 2014 enactment of PA 3 of Neither tolling nor extension provisions apply to audits commenced between February 6 and September 30, P.A. 79 of Eliminates the requirement that a taxpayer pay disputed assessment prior to petitioning for review by the Michigan Court of Claims. See MCL Section (2). 52

53 Other Notable Trends and Developments

54 Tax Haven Legislation Significant media attention, including attacks on the impact of offshore tax havens and inversion transactions on state tax revenues In an effort to combat the state impact of perceived international income shifting, six states - AK, MT, OR, WV, RI (2015), and CT (2016) - plus D.C., currently have some form of a tax haven statute that includes the income and apportionment factors of certain related corporations incorporated or doing business in a purported tax haven foreign jurisdiction. Montana and Oregon currently employ a statutory blacklist approach that identifies specific countries as tax havens Alaska, Rhode Island, West Virginia, Connecticut and the District of Columbia generally perform a more subjective analysis based on the individual facts and circumstances of each foreign entity and the countries involved Tax haven legislation has been active in a number of states, particularly blacklist approaches, and is expected to continue as a topic of interest at the state level 54

55 Puerto Rico Multistate Updates As of July 1, 2015 through March 31, 2016, the sales and use tax (SUT) rate increases from 7% to 10.5%. (The municipal sales tax rate will remain unchanged at 1%, for a total SUT rate of 11.5%.) The following services are subject to the 10.5% SUT: - Bank charges levied on business clients by financial institutions for the management of deposit accounts; - Collection services; - Security services, including armored services and private investigation services; - Cleaning and laundry services; - Repair and maintenance services; - Telecommunications services; - Waste disposal services; and - Daily rentals of motor vehicles. Services rendered by a merchant to another merchant or to a person engaged in a trade or business (B2B services) and designated professional services will be subject to a new 4% SUT that will apply during the period from October 1, 2015 to March 31, The municipal SUT will not apply to services subject to the 4% SUT. Value Added Tax (VAT) at 10.5% will replace the sales and use tax effective April 1,

56 Combined reporting states West of the Mississippi Alaska Arizona California Hawaii Idaho Kansas Minnesota Montana Nebraska North Dakota Oregon Utah East of the Mississippi Illinois Maine New Hampshire 56

57 Combined reporting states West of the Mississippi Alaska Arizona California Hawaii Idaho Kansas Minnesota Montana Nebraska North Dakota Oregon Texas (2008) Utah East of the Mississippi Connecticut (2016) District of Columbia (2011) Illinois Maine Massachusetts (2009) Michigan (2008) New Hampshire New York State (2007; 2015) New York City (2009) Rhode Island (2015) Vermont West Virginia (2009) Wisconsin (2009) 57

58 Question & Answer 58

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