top ten salt developments to watch out · 2020-05-24 · eversheds sutherland. washington ─on...

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TEI Atlanta Chapter

Top Ten SALT Developments to Watch

June 27, 2017 Scott Wright, Partner Alla Raykin, Associate Hanish Patel, Associate

Hanish Patel, Associate

10. WHEN ALL ELSE FAILS, MAKE IT RETROACTIVE

Taxpayers urge the U.S. Supreme Court to intervene on retroactive state tax laws.

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Background

─ Retroactivity: When the legislature amends or enacts a law and applies it retroactively (i.e., a backward fix)

─ Due Process: No person shall be deprived of life, liberty, or property without due process of law • Procedural aspect • Substantive aspect

─ Rational Basis Test (United States v. Carlton, 512 U.S. 26 (1994)) • Retroactive tax legislation must be “supported by a legitimate

legislative purpose furthered by rational means.” • Requirements: (1) Legitimate legislative purposes; (2) Prompt action and

“modest” period of retroactivity • Same test as applied to retroactive economic legislation.


Supreme Court Denies Certiorari to Appeals

─ Last Month, the U.S. Supreme Court declined to hear: • Dot Foods Inc. v. Wash. Dep't of Revenue, 185 Wash.2d 239

(Wash. 2016) • In 2010, the Legislature retroactively amended the scope of the exemption

for periods after an initial Dot Foods opinion on a refund claim • Washington Supreme Court held that the large revenue losses were a

legitimate purpose to which the retroactivity period was rationally related

• Gillette Comm. Ops. N. Am. v. Mich. Dep’t of Revenue, 312 Mich. App. 394 (Mich. Ct. App. 2015), denying appeal, 499 Mich. 960 (Mich. 2016)

• One of 6 cases (IBM, Goodyear, Sonoco, DIRECTV, and Skadden, Arps) challenging Michigan’s 2014 retroactive repeal of the MTC’s alternative apportionment formula


9. All in the Name of Transparency

Seeking more information, but does it serve its purpose?


Background

─ Taxing authorities are increasingly seeking disclosure of more information • There are increased reporting requirements and disclosures of

information

─ Is it useful information? • Potential confusion • Additional compliance burden

─ Disclosure of confidential information?


Trend Toward Reporting

─ Forty-six states and the District of Columbia provide recipient disclosure for at least one key subsidy program (e.g., tax credits, enterprise zones, sales tax exemptions), according to a recent study

─ Recent Legislation • California A.B. 2900 (enacted 9/24/2016) – expands types of

information publicly disclosed online for the California Competes tax credit program

• Alabama S.B. 119 (enacted 5/21/2015) – new annual report detailing incentives information

• Kentucky H.B. 17 (enacted 4/25/2014) – new online database of incentives and participants

• Mississippi H.B. 1365 (enacted 4/23/2014) – new annual report detailing incentives and participants


Washington

─ On June 20, 2013, S.B. 5882 was enacted subjecting the amount claimed by a taxpayer for any “new tax preferences” to public disclosure

─ On September 14, 2016, the Washington Department of Revenue rolled out an online interactive tool to allow the public and policy makers to share data about tax preferences and incentives • Functionality includes the ability to see which businesses have

taken tax incentives and obtained the greatest benefit in any given year

• Includes data from calendar years 2004 through 2015

8. STREAM IN THE TAXES

States continue to struggle with the taxability of digitals goods.


What Are Consumer Digital Goods?

─ Often digital equivalents to historically-tangible items, e.g., books, music, video games, and video (movies, television)

─ Important distinctions with cloud-based services and B2B services

─ Influence of the Streamlined Sales and Use Tax Agreement (SSUTA) definition of specified digital products: • Digital audio works (includes “ringtones”) • Digital audio-visual works • Digital books

─ Taxation of digital goods is permitted ─ Sourcing: possession or first use


Video Streaming Taxation

─ Kentucky Fin. Admin. Cabinet v. Netflix Inc., No. 15-CI-01117 (Ky. Cir. Ct. Aug. 23 2016): Franklin County Circuit Court held that Netflix’s streaming service was not subject to the Gross Revenues Tax, Excise Tax. • For the taxes to apply, Netflix’s streaming service must be a

“multichannel video programming service” • Kentucky has appealed

─ Alabama withdrew proposed amendments to the state’s rental tax regulations, which would have applied the tax to “digital transmissions” including on-demand movies and TV, and streaming audio and video. Prop. Ala. Admin. Code r. 810-6-5.09.

─ The Chicago Department of Revenue determined that amusements that are delivered electronically (i.e., streaming services) are subject to Chicago’s amusement tax. Amusement Tax Ruling No. 5 (Jun. 9, 2015).

─ California localities have explored expanding their utility user tax (UUT) to apply to “video services”

7. LET’S KEEP IT AT ARM’S LENGTH

States look toward IRC § 482-like authority to address intercompany transactions.


Most States Have Transfer Pricing Authority

─ Many states have statutes that adopt or are substantially similar to § 482 • States with § 482 may or may not incorporate the federal

regulations

─ Some states assert statutory language broader than federal § 482 authority (e.g., Virginia)

─ Some states with no § 482 equivalent assert their right to adjust intercompany pricing by asserting general federal conformity or general discretionary authority

─ Nearly every state adopts some statutory regime to adjust prices of intercompany transactions • Notable states that do not: Delaware, New Mexico, and

Pennsylvania


Increased Interest in State Transfer Pricing

─ Over the last few years interest in transfer pricing has increased among the states

─ In part, this is due to the global attention accorded to the problem of cross-border income taxation and to the Organization for Economic Co-operation and Development’s (OECD) Base Erosion and Profit Shifting (BEPS) Project

─ It is also attributable to the publicity surrounding the Multistate Tax Commission’s (MTC) Arm’s Length Adjustment Services (ALAS) Project

─ In particular, many states with separate entity reporting have expressed interest in expanding their transfer pricing audit capabilities

6. PARTNERSHIPS, TREAD CAUTIOUSLY, MURKY WATERS AHEAD

There’s great uncertainty on the state and local tax impact of

the recent federal partnership audit reform.


State Issues

─ Will state law conform to the new federal changes? • Not automatically

• States use the IRC only to compute taxable income and do not incorporate IRC administrative procedures

• Practitioners need guidance for dealing with partnership and operating agreements

─ Without automatic adoption, where does that leave states? • For partnerships assessed by the IRS at the entity level, how will

states impose related state tax? • How are states to deal with the liability being assessed in “year

of adjustment” rather than “year of review”?


Existing State Enforcement Mechanisms

─ Many states already use two types of enforcement mechanisms for nonresident partners: • Impose withholding requirement on partnership for income

passed through to nonresident partners (or nonresident partner consents to state taxation)

• Impose a composite filing requirement

─ Could states modify/expand these to require entity level audit liability remittance?

5. ROLL BACK THOSE ADDBACKS

Taxpayers face an uphill battle with meeting expense disallowance exceptions.


Background

─ Many states have adopted statutes requiring deductions created through transactions with related parties to be “added back” unless a statutory exception applies

─ Statutory exceptions are intended to cure intrinsic

overreach • Exceptions vary by state and may include:

• Income is subject to tax/tax paid • Income is subject to a treaty exemption • Conduit • Would be unreasonable to require addback


Background

─ Numerous hurdles with meeting statutory exceptions, such as: • Narrow or uncertain interpretations • Documentation requirements

─ Potentially more hurdles for interest addback exceptions

with the Final and Temporary Regulations under IRC § 385 (T.D. 9790) released on October 13, 2016 • States could attempt to deny an interest expense deduction by

applying the Regulations to treat the debt as equity • This would be particularly relevant where a state’s add back statute applies

narrowly (e.g., only to interest related to intangible assets)


Kohl’s Dep’t Stores, Inc. v. Virginia Dep’t of Taxation, 91 Va. Cir. 499 (Va. 13th Jud. Cir. Ct. 2016)

Virginia – “Subject to Tax” Addback

─ On February 3, 2016, a Virginia trial court held that royalties paid to related members must be added back to a taxpayer’s federal taxable income unless such payments are subject to actual income taxation to the related member.

─ Even where the royalties are reported by the related members to other states, such royalties do not qualify for the exception to the corporate income tax addback statute if the other states do not impose tax on such royalties.

─ Virginia Supreme Court heard oral arguments on April 21, 2017.

4. THE BOY WHO CRIED “FRAUD”

Class Action Lawsuits & False Claims Act (FCA)


False Claims Act

─ Approximately 30 jurisdictions currently have False Claims Acts • Most state FCA statutes contain explicit “tax bars” prohibiting qui tam

actions for allegedly false tax claims (e.g., CA, DC, HI, MA, NM, NYC, NC, TN, VA)

• Some states impose a tax bar only with respect to income tax matters (e.g., IL, IN, RI)

• A number of states do not appear to restrict the action to a particular subject matter (e.g., DE, FL, NV, NH, NJ)

─ Some states have False Claims Act “whistleblower” actions to include tax

─ Illinois and New York have seen the most aggressive False Claims Act litigation

─ Extremely high stakes: • Treble damages • Extended Statute of Limitations period • Public relations issue: tried in the public domain, often labeled tax fraud


Consumer Class Action Lawsuits

─ Suits for over-collection

─ Targeting large retailers

─ Targeted transactions: • Delivery fees • Coupons • Rebates • Returns

3. NO FORMULA TO APPORTIONMENT

States struggle with accurately capturing taxpayers’ in-state business activities.


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:

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• Connecticut • New York • District of Columbia • Pennsylvania • Louisiana • Rhode Island • Massachusetts • Tennessee • Nebraska


Recently Enacted Market-Based Sourcing

─ Connecticut • On June 6, 2016, S.B. 502 was enacted, which adopts market-

based sourcing effective for taxable years beginning on or after January 1, 2016

─ Louisiana • On June 28, 2016, H.B. 20 was enacted, which adopts market-

based sourcing effective for taxable years beginning on or after January 1, 2016

─ North Carolina • On July 1, 2016, H.B. 1030 was enacted, which adopts

proposed market-based sourcing provisions and requires the North Carolina Department of Revenue to issue related proposed regulations

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Market-Based Sourcing for 2016

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Income producing activity / cost of performance sourcing

Service performed sourcing

Market-based sourcing (DC)

* Based upon general sourcing rules.

Not applicable


Sales Factor Sourcing for 2016

Market-Based Sourcing

•Benefit Received •Arizona (election) •California •Iowa •Michigan •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 •Texas (Franchise tax)

Income Producing Activity/Cost of Performance

•Alaska •Arkansas •Florida •Hawaii •Idaho •Indiana (Benefit) •Kansas •Kentucky (Delivered)

•Mississippi (Benefit) •Missouri (Benefit) •Montana •New Hampshire •New Mexico (Delivered)

•North Carolina •North Dakota •Oregon •South Carolina •Vermont •Virginia •West Virginia

2. ERODING THE QUILL NEXUS STANDARD

In one swift swoop or one state at a time?


Shifting Nexus Landscape

─ U.S. Supreme Court in Quill Corp. v. North Dakota (1992): for a state to impose a sales & use tax collection obligation on an out-of-state seller, a physical presence in the state is required.

─ Direct Mktg. Ass’n v. Brohl (DMA) (2015) remanded Colorado use tax issue to the Tenth Circuit based on TIA • Justice Kennedy’s concurring opinion called Quill into question • Tenth Circuit upheld Colorado’s use tax regime, and DMA appealed • Colorado’s “Conditional Cross-Petition for Writ of Certiorari” • U.S. Supreme Court denied cert (Dec. 2016)

─ States have taken action to overturn Quill • Aggressive nexus positions • Anti-Quill legislation • Anti-Quill legislation that allows for immediate review by state courts • Use tax reporting

─ Federal legislation addressing state sales tax collection is caught up in political wrangling


Physical Presence Litigation

─ South Dakota v. Wayfair, Inc., et al., No. 32CIV16-00092 (6th Judicial Cir., S.D. 2017) • S.B. 106 asserts nexus against remote sellers with $100,000 gross

revenue from annual sales in the state or 200 separate transactions involving delivery into the state.

• State trial court found the remote sales tax law to be unconstitutional under Quill.

• Positioned for an expedited appeals process.

─ See also: • Newegg Inc. v. Ala. Dep’t of Revenue, No. S 16-613 (Ala. Tax Tribunal) • Am. Catalog Mailers Ass’n v. Gerlach, No. 7-0307-IV (Tenn. Ch. Ct.)

─ Several state legislatures are considering (or have considered) similar economic nexus provisions and/or use tax reporting requirements in the 2017 session.

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Post-DMA Challenges


Ohio - Factor Presence Nexus

─ Ohio adopted factor nexus provisions for CAT purposes. ─ The Department claimed the CAT is not governed by Quill

because it is not a sales and use tax. ─ Department also argued that the physical presence was

met because of “cookies” placed on in-state customers’ computers.

─ On November 17, 2016, the Ohio Supreme Court upheld the factor nexus provision because the Quill physical presence nexus standard does not extend to business-privilege taxes such as the CAT. The court distinguishes that physical presence is a sufficient condition to impose a business-privilege tax, but not a necessary one.

─ On April 20, 2017, taxpayers settled instead of appealing to U.S. Supreme Court. 33

Crutchfield, Inc., v. Testa, Nos. 15-0386, 15-0483, 15-0794, 2016 WL 6775765 (Ohio 2016)

1. STEP UP TO THE PLATFORM

With ecommerce, states look for opportunities to shift the tax collection obligation to new types of entities.


Ecommerce Platform Collection

─ With the expansion of electronic commerce marketplaces, states have looked for opportunities to shift the tax collection obligation to new types of entities

─ States have attempted to shift the tax collection obligation to these entities through: • Asserting these entities are the seller/vendor/retailer

• OTCs • Asserting these entities are agents for the sellers • Enacting legislation to require such entities to collect tax

• OTCs • Short-term rental platforms • Transportation platforms

• Proposing legislation to require such entities to collect • Credit and debit card processors • Marketplaces


Minnesota – Marketplace Nexus Provision

─ H.F. 1 signed May 30, 2017 (effective July 1, 2019 or if the U.S. Supreme Court overturns Quill, whichever is earlier)

─ Expands the definition of a “retailer maintaining a place of business in Minnesota” such as marketplace providers

─ Requires an affiliated marketplace provider to collect and remit tax, if the online retailer has over $10,000 in sales and is not registered

Eversheds Sutherland 37

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Questions?

Scott Wright 404.853.8374 [email protected] Hanish Patel 404.853.8066 [email protected] Alla Raykin 404.853.8033 [email protected]

top ten salt developments to watch out · 2020-05-24 · eversheds sutherland. washington ─on...

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