whirlwind review of new state tax laws · ©2014 sutherland asbill & brennan llp sourcing...

Whirlwind Review of New State Tax Laws

Todd Lard, Partner Sutherland Asbill & Brennan LLP Carley Roberts, Partner Sutherland Asbill & Brennan LLP FTA Annual Conference June 10, 2014

©2014 Sutherland Asbill & Brennan LLP

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

Equally weighted three factor formula

Double weighted sales factor

Triple or greater weighted or single sales factor *Does not address industry-specific or optional formulas

AK

HI

ME

VT NH MA

NY CT

PA

MD

DE

VA WV

NC

SC

GA

FL

IL OH IN

MI WI

KY

TN

AL MS

AR

LA TX

OK

MO KS

IA

MN ND

SD

NE

NM AZ

CO UT

WY

MT

WA

OR ID

NV

CA

DC

NJ

RI

3






AK

HI

ME

VT NH MA

NY CT

PA

MD

DE

VA WV

NC

SC

GA

FL

IL OH IN

MI WI

KY

TN

AL MS

AR

LA TX

OK

MO KS

IA

MN ND

SD

NE

NM AZ

CO UT

WY

MT

WA

OR ID

NV

CA

DC

NJ

RI

4






AK

HI

ME

VT NH MA

NY CT

PA

MD

DE

VA WV

NC

SC

GA

FL

IL OH IN

MI WI

KY

TN

AL MS

AR

LA TX

OK

MO KS

IA

MN ND

SD

NE

NM AZ

CO UT

WY

MT

WA

OR ID

NV

CA

DC

NJ

RI

5


Factor Weighting

•  States adopting/proposing single or hyper weighted sales factor: §  Adopted:

§  Missouri (2013) – H.B. 128, providing for an elective single-sales 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 6


Sourcing of Services

��

COP - Cliff COP - Percentage Market-sourcing approach No Income Tax Other Note: Year shown = States enacting market-state in past 10 years.

2011

2009

2010

2009

2007

2003

2007

2011 2005

2009

Phase-In 2014-2017

Effective 2014

2014 2013

2013

2013

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

10

Facts Kansas Taxable Income Plumber earns $200,000 operating as a sole proprietorship and reporting business income on Schedule C

$0

Plumber earns $200,000 operating as a DRE, partnership or S-Corp

$0 for Entity $0 for Plumber

Plumber’s apprentice earns $50,000 in wages working for plumber

$50,000

C-Corp makes $200,000 operating a plumbing business and does not issue a dividend

$200,000

C-Corp makes $200K operating a plumbing business and dividends the earnings to its sole shareholder who resides in Kansas

$0 for Entity because of DPD $200,000 for shareholder


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 related-member 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 [email protected]

Carley Roberts

Sutherland Asbill & Brennan LLP [email protected]

20


Connect with us!

The Sutherland SALT Shaker mobile app is now available. Download today from the: §  Windows Phone Store §  iTunes App Store §  Google Play §  Amazon Appstore for Android

Visit us at www.stateandlocaltax.com

@Sutherland_SALT Sutherland SALT Group

21

whirlwind review of new state tax laws · ©2014 sutherland asbill & brennan llp sourcing...

Documents