Todd Lard, Partner Sutherland Asbill & Brennan LLP Carley Roberts, Partner Sutherland Asbill & Brennan LLP FTA Annual Conference June 10, 2014 Whirlwind Review of New State Tax Laws
Agenda Factor Weighting Sourcing Sales of Other than Tangible Personal Property Major Reform Legislation that Needles Taxpayers Affiliate/Click-Through Nexus Sales Tax Base Changes Administrative Reform Section 18 Equity Mississippi post-equifax Reform Commissions Miscellaneous 2
Factor Weighting* - 1998 WA CA OR NV ID AZ UT MT WY CO NM ND SD NE KS OK MN IA MO AR WI IL MI IN KY TN OH PA WV VA NC SC NY NJ VT NH CT DE MD DC ME MA RI AK MS AL GA TX LA HI FL *Does not address industry-specific or optional formulas 3 Equally weighted three factor formula Double weighted sales factor Triple or greater weighted or single sales factor
Factor Weighting* - 2003 WA CA OR NV ID AZ UT MT WY CO NM ND SD NE KS OK MN IA MO AR WI IL MI IN KY TN OH PA WV VA NC SC NY NJ VT NH CT DE MD DC ME MA RI AK MS AL GA TX LA HI FL *Does not address industry-specific or optional formulas Equally weighted three factor formula Double weighted sales factor Triple or greater weighted or single sales factor 4
Factor Weighting* - 2013 WA CA OR NV ID AZ UT MT WY CO NM ND SD NE KS OK MN IA MO AR WI IL MI IN KY TN OH PA WV VA NC SC NY NJ VT NH CT DE MD DC ME MA RI AK MS AL GA TX LA HI FL *Does not address industry-specific or optional formulas Equally weighted three factor formula Double weighted sales factor Triple or greater weighted or single sales factor 5
Factor Weighting 6 States adopting/proposing single or hyper weighted sales factor: Adopted: Missouri (2013) H.B. 128, providing for an elective singlesales factor apportionment method Oregon (2013) H.B. 4200, providing that companies that meet certain minimum investment requirements will be guaranteed to be taxed using a single-sales factor apportionment method Proposed: District of Columbia (2014) FY2015 budget bill Rhode Island (2014) S 2988, introduced May 7, 2014 Kentucky (2014) Governor s proposed KY tax plan North Carolina (2014) quadruple sales factor - H.B. 1050, failed
Sourcing of Services 2007 2009 2007 2014 2013 2009 Effective 2014 2009 2003 2013 2011 Phase-In 2014-2017 2010 2011 2005 2013 Note: Year shown = States enacting market-state in past 10 years. 7
Sourcing Methodologies States adopting/proposing market based sourcing: Adopted: New York (2014) 2014-2015 New York State Budget, Senate Bill 6359-D and Assembly Bill 8559-D Massachusetts (2013) H.B. 3535, draft regulations released March 25, 2014 Pennsylvania (2013) Applicable to tax years beginning after December 31, 2013 Texas (2013) H.B. 585, requires market-based sourcing for internet hosting providers Proposed: Missouri (2014) S.B. 662 New Jersey (proposed 2013) DOT proposed regulations for market-based sourcing of service receipts; subsequently withdrawn 8
Major Reform KS & MO Kansas HB 2117 (2012) Individuals can subtract from federal AGI All schedule C income Income from partnerships, S Corps., rental real estate, royalties, etc. Farm Profits Individuals cannot subtract from federal AGI Wages Interest, Dividends, capital gains Missouri SB 509 (2014) Similar to Kansas, but phased-in and capped at 25% subtraction Enacted as an override to Governor s veto 9
Major Reform KS & MO Facts Plumber earns $200,000 operating as a sole proprietorship and reporting business income on Schedule C Plumber earns $200,000 operating as a DRE, partnership or S-Corp Plumber s apprentice earns $50,000 in wages working for plumber C-Corp makes $200,000 operating a plumbing business and does not issue a dividend C-Corp makes $200K operating a plumbing business and dividends the earnings to its sole shareholder who resides in Kansas Kansas Taxable Income $0 $0 for Entity $0 for Plumber $50,000 $200,000 $0 for Entity because of DPD $200,000 for shareholder 10
Major Reform - NY New York s Budget Legislation Mandatory Unitary Combined Filing Economic Presence Nexus Income Tax Base Changes Sourcing/Apportionment (market-based approach) Net Operating Losses (NOLs) and other Tax Attributes Rate Changes Capital Base Changes Financial and Insurance Industry Impact 11
Legislation that Needles Taxpayers Virginia add-back clarifications H.B. 5001 (2014), limits exceptions provided for: Expenses on affiliate royalty payments subject to tax in other jurisdictions to post-apportionment tax payments made on relatedmember royalty payments in other jurisdictions, and Amounts paid to related members that license intangibles to unrelated companies to receipts "derived from licensing agreements for which the rates and terms are comparable to the rates and terms of agreements that the related member has actually entered into with unrelated entities" California excessive executive comp. (rejected) S.B. 1372, failed to pass Senate with a 19-17 vote, bill would have: Replaced a publicly traded corporation s current tax rate starting Jan. 1 with one based on a ratio between its top paid employee and the median workers salary, and Reduced the corporate tax rate for any company in which the CEO s pay is less than 100 times that of the median worker. The lowest tax rate would have been 7 percent for any company whose chief executive is paid less than 25 times the median 12
Legislation that Needles Taxpayers Illinois public disclosure of tax returns (pending) H.B. 3627, requires: Publicly traded corporations to file annual reports with the secretary of state, itemizing information about the corporation, including its taxable base, net income, apportionment factor, net operating loss deduction, individual credits claimed, and any taxes owed The information is then required to be available to the public for two years after the close of an applicable tax year Maine tax havens L.D. 1120 introduced to close offshore tax loopholes Requires unitary members incorporated in designated tax haven countries to be included in the measure of income for state corporate income tax purposes 13
Affiliate Nexus/Click-Through Nexus Affiliate Nexus New Jersey (2014) A. 937, pending Iowa (2013) Click-Through Nexus Illinois (2014) S.B. 352, pending South Carolina (2014) S. 870, pending Hawaii (2014) H.B. 1651, pending, passed House Kansas (2013) Minnesota (2013) Missouri (2013) 14
Sales Tax Base Changes DC Yoga Tax (2014) pending Expands D.C. s sales tax to, among other things, (i) the service of a health club or tanning studio, including yoga studios; (ii) storage rental services; (iii) carpet cleaning services; and (iv) the use of bowling and billiards facilities Maine (2013) L.D. 1509, imposes sales and use tax on products otherwise taxable that are transferred electronically Massachusetts (2013) H.B. 3535, imposes sales tax on computer system design services, defined as the planning, consulting or designing of computer systems that integrate computer hardware, software or communication technologies and are provided by a vendor or a third party 15
Administrative Reform Alabama Tax Appeals Commission (2014) Illinois Tax Tribunal (2012) effective 2013 Georgia Tax Tribunal (2013) Washington S.B. 6176 (pending) calls for creation of independent tax tribunal Louisiana Tax Court (pending) 16
Section 18 Equity Mississippi s Equifax changes H.B. 799: Law sets new conditions for the MS DOR to follow in applying alternative apportionment methods: Explicitly places the burden of proof on the party invoking the alternative method to prove by a preponderance of the evidence that 1) the statutory or regulatory methods do not fairly represent the extent of the taxpayer s business activity in the state and 2) the method selected more fairly represents that activity than any other reasonable method available Requires that alternative apportionment be invoked only in limited and unique, nonrecurring circumstances when the standard apportionment provisions produce unanticipated results that do not fairly represent the extent of the taxpayer s business activity in Mississippi Prohibits the DOR from invoking its forced combination authority until it has adopted regulations that specify the criteria and circumstances it must use to meet the preponderance of the evidence standard necessary to support an assumption that intercompany transactions resulted in the improper shifting of taxable income 17
Reform Commissions District of Columbia Tax Revision Commission Final report issued May 2014 recommending, among other things: Single-sales factor apportionment methodology Expansion of sales tax to more services Lower the business franchise tax to 8.25% from 9.975% Kentucky Blue Ribbon Commission on Tax Reform Final report issued December 2012, recommending, among other things, the adoption of a single-sales factor apportionment methodology New York State Tax Reform and Fairness Commission Maryland Communications Tax Reform Commission Minnesota Senate Tax Reform Division 18
Miscellaneous Combined Reporting Rhode Island (2014) S. 2988, pending Tax Amnesty Programs Massachusetts (2014) separate bills passed House and Senate Provides for a two-month amnesty for sales and use taxes, income tax withholding, passthrough entity withholdings, and some other levies Louisiana (2014) H.B. 663, pending Amends current amnesty program by waiving 67% of penalties and 33% of interest during the 2014 amnesty period, as well as 33% of penalties and 17% of interest during the 2015 amnesty period Tax Expenditures: Vermont (2014) H 844 - Disclose taxpayers who claimed R&D Credit. New Jersey (2014) A.B. 939, pending (passed Assembly) 19
Questions? Todd Lard Sutherland Asbill & Brennan LLP todd.lard@sutherland.com Carley Roberts Sutherland Asbill & Brennan LLP carley.roberts@sutherland.com 20
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