Shifting Apportionment Landscape TEI Nevada Chapter

Transcription

1 Shifting Apportionment Landscape TEI Nevada Chapter April 19, 2017 Jeff Friedman Partner Marc Simonetti Partner 2017 (US) LLP All Rights Reserved. This communication is for general informational purposes only and is not intended to constitute legal advice or a recommended course of action in any given situation. This communication is not intended to be, and should not be, relied upon by the recipient in making decisions of a legal nature with respect to the issues discussed herein. The recipient is encouraged to consult independent counsel before making any decisions or taking any action concerning the matters in this communication. This communication does not create an attorney-client relationship between (US) LLP and the recipient. (US) LLP is part of a global legal practice, operating through various separate and distinct legal entities, under. For a full description of the structure and a list of offices, please visit

2 Agenda Market-Based Sourcing Update Alternative Apportionment Gaming & Gambling Receipts Sourcing Case Developments Other Notable Case Developments 2

3 Market-Based Sourcing Update

4 Shift Toward Market-Based Sourcing Changing economy causing states to shift toward adoption of market-based sourcing. 23 states and the District of Columbia have adopted market-based sourcing for service receipts. Since 2014, the following jurisdictions have shifted to market-based sourcing: Arizona (elective phase-in ) Nebraska (2014) Connecticut (2016) New York (2015) District of Columbia (2015) Pennsylvania (2014) Louisiana (2016) Rhode Island (2015) Massachusetts (2014) Tennessee (July 1, 2016) Missouri (elective August 28, 2015) 4

5 MTC Adopts Allocation and Apportionment Regulations In July 2014, the Multistate Tax Commission (MTC) approved amendments to the model statutory sourcing rules for sales other than sales of tangible property under Article IV, Section 17 of the Multistate Tax Compact (Section 17). Adopted market-based sourcing (replacing greater costs of performance provisions) Since November 2014, a working group with representatives from several states met weekly to discuss and draft a model market-based sourcing regulation. Sourcing of services and intangibles models closely to Massachusetts market-based sourcing regulation (830 CMR ) In July 2015, the working group presented draft Model Regulations. On February 24, 2017, the MTC approved the Model Regulations. 5

6 North Carolina Market-Based Sourcing Study On October 1, 2015, H.B. 258 was enacted to study the calculation of the sales factor using market-based sourcing. On July 1, 2016, H.B was enacted, which adopts proposed market-based sourcing provisions and requires the North Carolina Department of Revenue to issue related proposed regulations. On October 3, 2016, the Department of Revenue released proposed regulations. On February 16, 2017, the Rules Review Commission approved the proposed regulations. To become effective, the General Assembly must enact the proposed statutory changes. 6

7 Sales Factor: Market-Based Sourcing for Services MO Market-based sourcing is available for taxpayers electing single sales factor. AZ An election is available to phase-in market-based sourcing for multistate service providers. No income-based tax IPA/COP (AK, HI) Benefit/Market (DC) FL IPA/COP rule is not supported by a statute; thus, the rule is invalid, and Florida should be interpreted as a market-based sourcing state. Service Performed in State (%) IPA/Market/Other (FL, MO) NOTE: Different sourcing rules may apply to intangibles 7

8 Sales Factor: Market-Based Sourcing for Services Market Based Sourcing Benefit Received Arizona (elective)* California* Iowa* Michigan* Missouri* Ohio (CAT) Rhode Island* Utah Washington (B&O) Wisconsin* Service Received Illinois* Maine* Minnesota* Market Based Sourcing Service Delivered Alabama District of Columbia* Louisiana* Massachusetts Pennsylvania* Tennessee Service Used Connecticut* Customer Located Georgia* Maryland Nebraska* New York* Oklahoma Service Performed Colorado Delaware New Jersey North Carolina South Carolina Texas (fair value) Income Producing Activity (COP) Alaska Arkansas Florida Hawaii Idaho Indiana (Benefit) Kansas Kentucky (Delivered) Mississippi (Benefit) Montana New Hampshire New Mexico (Delivered) North Dakota Oregon Vermont Virginia West Virginia *Single Sales Factor 8

9 Issues in Applying Market-Based Sourcing How do you determine where a service is received or delivered? How do you define the benefit of the service? How do you determine where the benefit is received, or the service is used? What if the benefit is received in more than one state? What if the benefit or delivery location is undeterminable? When do you look through to the ultimate customer or ultimate marketplace? If the state requires the taxpayer to apply a hierarchy, how do you establish that you have done the due diligence required? What does it mean to reasonably approximate? 9

10 Alternative Apportionment

11 Invoking Alternative Apportionment Moving Party Assert Distortion Yes No Proposed Alternative Reasonable Yes No Alternative Apportionment No Alternative Apportionment No Alternative Apportionment Burden of proof is on the party seeking to diverge from the standard apportionment formula to prove that distortion exists, and that a proposed alternative method is reasonable.

12 Massachusetts Burden of Proof Proposed Amendments to Alternative Apportionment Regulation Massachusetts Department of Revenue Released Proposed Amendments to Alternative Apportionment Regulation, 830 CMR , in December Timing Taxpayer must request alternative apportionment at the time it files its tax return but must pay tax using statutory method and wait for Commissioner's subsequent determination with respect to the application. If theapplication is granted, taxpayer must seek a refund Application deemed denied after 9 months. Commissioner will look at overall combined group s apportioned income in determining whether individual member entitled to alternative apportionment. Disparate burdens of proof Taxpayer must show by clear and cogent evidencethat statutory method does not fairly reflect its in-state business activities. Commissioner uses his judgmentin deciding whether to grant taxpayer s application but is otherwise not subject to any standards. 12

13 Tennessee - Administrative Market-Based Sourcing Vodafone Am. Holdings, Inc. & Subs. v. Roberts, 486 S.W.3d 496 (Tenn. 2016) Tennessee Supreme Court upheld Department of Revenue s use of alternative apportionment for a wireless company because the statutory costs of performance method did not fairly represent the extent of the taxpayer s business activity in the state. Court held that the method employed by the Commissioner, which was similar to a market-based approach, satisfied regulatory standards for the imposition of alternative apportionment. 13

14 South Carolina - Alternative Sourcing Rejected Rent-A-Center West Inc. v. S.C. Dep t of Revenue, 418 S.C. 320 (S.C. Ct. App. 2016) Under statutory method, the numerator of R-A-C West s receipts factor included South Carolina receipts from licensing IP and the denominator included all revenue from retails stores and licensing activities. Department of Revenue argued that including the retail sales in the denominator diluted the receipts factor; Department s expert opined that including both royalty and retail receipts in the denominator was like putting apples in the numerator and apples and oranges in the denominator. South Carolina appellate court held that Department failed to satisfy its burden of showing that the statutory formula did not fairly represent taxpayer s in-state business activity. 14

15 Colorado Improper Use of Alternative Apportionment Target Brands, Inc. v. Dep t of Revenue, No. 2015CV33831 (Colo. 2nd Dist. Ct. 2017) On Jan. 20, 2017, a Colorado district court found that despite lacking any physical presence in state, subsidiary that managed company s brands had substantial nexus in Colorado because its IP licenses were used there. However, Department of Revenue s use of its alternative apportionment authority to exclude subsidiary s substantial out-of-state property and payroll from apportionment factors was unreasonable. 15

16 New Jersey - If Distortion, What s Appropriate? Canon Financial Services, Inc. v. Dir., Div. of Taxation, No , 2016 WL (N.J. Tax Ct. 2016) (unpublished) Under prior law, taxpayer without regular place of business outside New Jersey had to use 100% apportionment factor, while taxpayer with regular business outside state used three-factor formula. New Jersey-headquartered company without regular place of business outside state requested alternative apportionment on distortion grounds. New Jersey Tax Court concluded that 100% apportionment factor, even with credit for taxes paid in separate return states, was distortive; but taxpayer was not entitled to use three-factor formula. Remanded to Division of Taxation to craft appropriate relief. 16

17 Gaming & Gambling Receipts

18 State Income Tax Issues Gaming and Gambling Activities Online gambling New Jersey, Nevada, Delaware Online gaming Casinos Racing Sourcing General other receipts sourcing provision? Costs of performance sourcing? Situs of use? Location of customer? Amount E.g., handle v. commissions

19 Illinois Only Gambling Commissions Included Churchill Downs Inc. v. Il. Dep't of Revenue, No L (Il. Cir. Ct. 2015) The Circuit Court of Cook County found that the Department of Revenue erroneously included the handle, instead of the taxpayer s commissions from the handle, in the computation of the taxpayer s sales factor from wagering. The court determined that the taxpayer had no legal right to the handlein total and the handle is not the proper reflection of taxpayer s business. Pari-mutuel wagering was found to be no different than other similar services. 19

20 New York Out-of-State Simulcast Subject to Tax Yonkers Racing Corp. v. State, 705 N.Y.S.2d 193 (N.Y. Sup. Ct. 2000) Pari-mutueltax was upheld on fees paid on out-of-state simulcast transmissions of New York races retransmitted in Connecticut to off-track betting locations in Connecticut. The court reasoned that what was taxed was an event or transaction originating in New York, not something beyond its borders. 20

21 Sourcing Case Developments

22 New York Online Service Sourcing In the Matter of the Petitions of CheckfreeServices Corp., Nos & , 2017 WL (N.Y. Div. Tax. App. 2017) On January 5, 2017, the New York Division of Tax Appeals determined that a taxpayer s electronic bill payment and presentation (EBPP) receipts constitute service receipts and not other business receipts, and are properly sourced where the service is performed. The ALJ sanalysis largely mirrors the analysis in In the Matter of the Petition of Expedia, Inc., Nos & (N.Y. Div. Tax. App. Feb. 5, 2015): A service does not require human involvement; The taxpayers did have some human involvement even though the service had an automated component; and Service receipts are properly sourced where performed, which is the taxpayer s location, not the customer s location. 22

23 New York City Allocating Consulting Services In re Gerson LehrmanGroup, Inc., TAT(H) 08-79(GC), 12-38(GC) & 12-39(GC), 2016 WL (N.Y.C. Div. of Tax App. 2016) Addressed whether the services constituted consulting services the receipts from which would be sourced based on where the services were performed or services rendered by the salespeople who sold the subscription agreements for such services, which would be sourced to the office locations of the salespeople. The ALJ concluded that taxpayer was providing expert knowledge, analysis and views; the fact that clients pay for the service via subscription agreements is not relevant in determining what the service is and where the service is performed. 23

24 New Jersey Sourcing Credit Card Services Bank of America Consumer Card Holdings v. Div. of Taxation, No , 2016 WL (N.J. Tax Ct. 2016) The New Jersey Tax Court held that the taxpayers must source 50% of their credit card service fees (e.g., late fees, return check fees, over the limit fees, non-sufficient fund fees, and annual fees) to New Jersey based on the State s regulatory 25/50/25 rule: 25% to where the service originates; 50% to where the service is performed; and 25% to where the service terminates. The court s opinion conflicts with New Jersey s statutory rules because New Jersey has not adopted market-based sourcing. The statute looks to the location of performance. 24

25 Other Notable Case Developments

26 New Jersey Throwout Rule Clarification Elan Pharmaceuticals, Inc. v. Dir., Div. of Taxation, No , 2017 WL (N.J. Tax Ct. 2017) The taxpayer included sales of tangible personal property shipped from locations outside New Jersey to states in which the taxpayer was immune from tax under P.L in its sales factor denominator. On February 6, 2017, the New Jersey Tax Court rejected the Division of Taxation s attempt to apply the throwout rule to these receipts. The court found it irrelevant whether the receipts were actually included in the numerator of a sales factor of another state. 26

27 New Jersey - Federal Disallowance Impacts Factors General Foods Credit Investors #3 Corp. v. Dir., Div. of Taxation, 29 N.J.Tax 590 (N.J. Tax Ct. 2017) On February 22, 2017, the New Jersey Tax Court held that the property and sales factors of the taxpayer were properly adjusted by the taxpayer when the IRS disallowed depreciation and receipts from a saleleaseback transaction. Since the IRS did not respect the sale-leaseback transaction, the factors needed to be adjusted to remove the associated assets and resulting receipts from the taxpayer s factors. 27

28 Questions? 28

29 Connect with us! Download the SALT Shaker app today Be sure to also submit your pet through our app to be featured as Pet of the Month! Apple App Store Google Play Amazon 29

30 Contact us Jeff Friedman Partner (US) LLP Marc Simonetti Partner (US) LLP stateandlocaltax.com eversheds-sutherland.com 2017 (US) LLP All rights reserved. This communication cannot be used for the purpose of avoiding any penalties that may be imposed under federal, state or local tax law.