2018 NAFC ANNUAL CONFERENCE. THE CHANGING FINANCIAL LANDSCAPE IN TRUCKING: addressing opportunities and challenges

Transcription

1 2018 NAFC ANNUAL CONFERENCE THE CHANGING FINANCIAL LANDSCAPE IN TRUCKING: addressing opportunities and challenges

2 State Income Tax Update Agenda State Impacts of Federal Reform State Nexus Apportionment for Transportation State Restructuring

3 State Implications of Federal Tax Reform

4 Current IRC Conformity WA Current IRC Non-Current IRC CA OR NV ID UT MT WY CO ND SD NE KS MN IA MO WI IL MI OH IN KY WV PA NY MD D C VA VT NH NJ DE ME MA CT RI AZ NM OK AR TN SC NC AK MS AL GA TX LA FL Note: This map reflects IRC Conformity as of April 13, 2018 and is for illustrative purposes only. Please consult primary authority before taking any tax positions.

5 State Implications of Tax Reform Section Repatriation Toll Tax Most states not taxing Limited number of states (6) will attempt to tax partially

6 Section 965 Taxable? WA Taxable Non-Taxable CA OR NV ID UT MT WY CO ND SD NE KS MN IA MO WI IL MI OH IN KY WV PA NY MD D C VA VT NH NJ DE ME MA CT RI AZ NM OK AR TN SC NC AK MS AL GA TX LA FL Note: This map reflects IRC Conformity as of May 2, 2018 and is for illustrative purposes only. Please consult primary authority before taking any tax positions.

7 State Implications of Tax Reform Section 163(j) Interest Limitation Several states have decoupled Those conforming to limitation are examining rate reduction to offset base expansion

8 Section 163(j) Conformity? WA Conforming Non-Conforming CA OR NV ID UT MT WY CO ND SD NE KS MN IA MO WI IL MI OH IN KY WV PA NY MD D C VA VT NH NJ DE ME MA CT RI AZ NM OK AR TN SC NC AK MS AL GA TX LA FL Note: This map reflects IRC Conformity as of April 13, 2018 and is for illustrative purposes only. Please consult primary authority before taking any tax positions.

9 State Implications of Tax Reform Section 168(k) Bonus Depreciation Conformity generally consistent with prior treatment Connecticut exception non-standard mechanism for 100% Illinois exception decoupled from 50% but allowing 100% Pennsylvania exception not allowing recapture until asset is disposed

10 Section 168(k) Conformity? WA Conforming Non-Conforming CA OR NV ID UT MT WY CO ND SD NE KS MN IA MO WI IL MI OH IN KY WV PA NY MD D C VA VT NH NJ DE ME MA CT RI AZ NM OK AR TN SC NC AK MS AL GA TX LA FL Note: This map reflects IRC Conformity as of April 13, 2018 and is for illustrative purposes only. Please consult primary authority before taking any tax positions.

11 State Implications of Tax Reform Net Operating Losses Many states are conforming to the 80% limitation Indefinite carryforward is less widely adopted Carrybacks are essentially dead

12 State Implications of Tax Reform Section 199a Pass-through Deduction States will be slow to respond, but by default, will generally decouple Computed at owner level, generally not applicable on composite/withholding

13 State Implications of Tax Reform State Tax Deduction Cap Several states have developed charitable contributions workaround This may be risky, IRS likely to challenge

14 State Implications of Tax Reform Other than 965 and bonus, most provisions become effective 2018 or later, so states still weighing their options From a policy perspective, should be revenue neutral, but windfall is a tempting tool to close deficits

15 State Nexus

16 State Nexus Nexus the minimum connection sufficient to create a tax obligation Complete Auto Transit v. Brady (1977) MTC de minimis rule State specific positions Bright-line nexus standard

17 State Nexus Complete Auto created 4-prong test Substantial nexus Nondiscriminatory Fairly apportioned Fair relationship to services received

18 State Nexus MTC de minimis (Reg IV.18(g)(5)) No property No pickup or delivery <25,000 miles and <3% of miles <12 trips

19 State Nexus CA MTC rule NJ One trip PA 50k miles and 12 pickups/deliveries (policy in 2000) TN - no stops/no nexus (Rev. Rul. 17-8)

20 State Nexus Bright-line nexus Determination of nexus when instate revenues exceed threshold Problematic for remote service providers Might Wayfair decision have impact?

21 Apportionment

22 Apportionment The basics Settled law that the entire net income of a corporation, generated by interstate as well as intrastate activities, may be fairly apportioned among the States for tax purposes by formulas utilizing in-state aspect of interstate affairs. Commerce Clause requires that income tax must be fairly apportioned and fairly related to the activities in the state Due Process Clause requires a rational relationship between the income attributed to the State and the intrastate values of the enterprise.

23 Apportionment Three-Factor Formula Small number of states still have standard, three-factor apportionment (i.e., equally weighted property, payroll and sales factors) Modified Three-Factor Formula Handful of states have variation on three-factor theme Typically a multiple weight on sales Single Sales Factor The trend is to use a single sales factor for apportioning business income

24 Apportionment MTC Method Explained Sales Factor - The total revenue of the taxpayer attributable to this state during the income year from hauling freight, mail, and express shall be: 1. Intrastate: All receipts from any shipment which both originates and terminates within this state; and, 2. Interstate: That portion of the receipts from movements or shipments passing through, into, or out of this state as determined by the ratio which the mobile property miles traveled by such movements or shipments in this state bear to the total mobile property miles traveled by movements or shipments from points of origin to destination.

25 Apportionment MTC Method Explained Payroll Factor - The numerator of the payroll factor is the total compensation paid in this state during the income year by the taxpayer. With respect to all personnel, except those performing services within and without this state, compensation paid to such employees shall be included in the numerator. With respect to personnel performing services within and without this state, compensation paid to such employees shall be included in the numerator of the payroll factor in the ratio which their services performed in this state bear to their services performed everywhere based on mobile property miles.

26 Apportionment MTC Method Explained Property Factor - Mobile property as defined in this regulation, which is located within and without this state during the income year shall be included in the numerator of the property factor in the ratio which mobile property miles in the state bear to the total mobile property miles. A "mobile property mile" is the movement of a unit of mobile property a distance of one mile whether loaded or unloaded.

27 Apportionment Mileage IFTA v. Revenue Miles Other variations States with no industry specific guidance

28 Apportionment Service Income Market-Based Sourcing Look to customer location to determine proper sourcing Taxpayer assigns receipts to state in which the customer receives the benefit of the service Some states require and/or default to customer billing address In the transportation industry, consideration should be given for the destination of the freight

29 Apportionment Service Income Market based sourcing of service revenue appears to be convergent with trend towards single-sales factor apportionment. Market sourcing of service revenue applies imposition of taxation on the taxpayer's access to a marketplace. Each state has a little different take on market sourcing and, because it is somewhat novel, there is ambiguity / flexibility. Where does customer receive the benefit of the service? Beware of Illinois throw-out rule (and other states)

30 Tax Restructuring Opportunities

31 Tax Restructuring Opportunities -Reasons to Consider Restructuring Replace outdated planning Changes in management or tax personnel Changes in state tax legislation Unable to account for intercompany transactions Align operations Align business operations and geographies Liability purposes

32 Tax Restructuring Opportunities -Reasons to Consider Restructuring Simplify current structure Match profitable and unprofitable companies Eliminate inactive or dormant subsidiaries Reduce the amount of state tax returns Reduce administrative compliance costs

33 Tax Restructuring Opportunities -Reasons to Consider Restructuring Before you begin Have a business purpose Consult with all affected parties to mitigate risk Legal department Other tax groups: Federal, Sales & Use, Property, Payroll Operational groups, as applicable Consider future direction of the company

34 Tax Restructuring Opportunities - Structure Simplification Example 1 Facts All companies in the structure are C corporations Structure includes the following: 1. Company A: operating parent, incorporated in Delaware, always been profitable. 2. Company B: incorporated in Delaware, always been profitable, acquired two years ago. 3. Company C: incorporated in Illinois, historical losses.

35 Tax Restructuring Opportunities - Structure Simplification Example 1 Current State Company A (DE) Company B (DE) Company C (IL)

36 Tax Restructuring Opportunities - Structure Simplification Example 1 Step 1: Convert Company B into a SMLLC Company A B, LLC Company C 36

37 Tax Restructuring Opportunities - Structure Simplification Example 1 Step 2: Create C, LLC a SMLLC Company A B, LLC Company C C, LLC 37

38 Tax Restructuring Opportunities - Structure Simplification Example 1 Step 3: Merge Company C into C, LLC Company A A B, LLC Company C C, LLC 38

39 Tax Restructuring Opportunities - Structure Simplification Example 1 Final State Company A B, LLC C,LLC 39

40 Tax Restructuring Opportunities - Structure Simplification Example 1 Simplified Structure For federal tax purposes, Company A is the filer and is treated as a single entity For legal purposes, and for certain other taxes, all three entities exist Company A B, LLC C,LLC

41 Tax Restructuring Opportunities - Special- Purpose Entities Example 2 Facts Company is a trucking company ("TC"). In addition to transporting freight, TC also brokers loads using third-party carriers. TC is located in a unitary state and files returns in almost every state. TC pays a significant amount of state income tax and wants to manage its effective state tax rate.

42 Tax Restructuring Opportunities - Special- Purpose Entities Example 2 Historic trucking business operations Shipper $300 Trucking Company

43 Tax Restructuring Opportunities - Special- Purpose Entities Example 2 Step 1: TC creates Broker Sub by contributing: Assets Operations Personnel Trucking Company Broker Sub

44 Tax Restructuring Opportunities - Special- Purpose Entities Example 2 New State Trucking Company Shipper $290 Broker Sub

45 Tax Restructuring Opportunities - Special- Purpose Entities Example 2 TC Would Maintain: Assets Operations Personnel Broker Would Maintain: Shipper Contracts/invoicing Marketing IT/administrative Trucking Company Broker Sub

46 Questions?