Inside SALT: Significant State Tax Developments and Opportunities

June 8, 2017 – New York, NY

Lawyers in McDermott Will & Emery’s State and Local Tax Group present an informative half-day program. A wide range of topics will be discussed, including:

  • New York developments, including false claims and budget provisions
  • Nexus updates and developments in digital taxation
  • New developments in apportionment, transfer pricing developments and unclaimed property

You can still register! Click here to view more details and register for the event.

Tax in the City®: A Women’s Tax Roundtable

June 8, 2017 – Chicago, IL

McDermott Will & Emery’s Tax in the City® is a discussion and networking group for women in tax that facilitates in-person connections and roundtable study group events around the country.

At this year’s second edition of Tax in the City®, we will host a CLE/CPE discussion focusing on current developments in professional responsibility and ethics, including a presentation focused on ethical issues arising out of our increasing access to connectivity (such as Facebook, Twitter, and other social media outlets). This will be followed by a substantive lunch program featuring the following topics:

  • Best Practices for Drafting Tax Provisions in Commercial and Other Contracts
  • Getting Ready for 2018 – Taking Steps to Prepare for Rules that Become Effective 01/01/2018
  • Tax Reform – What Can / Should You Be Doing Now?

To find our more information about Tax in the City® and get involved in future events, please email khazel@mwe.com, jmay@mwe.com or smcgill@mwe.com.

Changing the past: Serious scientists, talented fantasists, regretful Ashley Madison members and many other segments of humanity have considered, and even longed for, the ability to rewrite history. One group has apparently succeeded – state legislatures that backdate tax law changes.

Such success may be short lived, however, as experts identify significant legal and policy faults with retroactively changing tax obligations.  Two recent articles in State Tax Today explain why retroactive tax laws should not be passed and if they are, should be invalidated by the courts – and invalidated retroactively. In “Retroactive Tax Laws Are Just Wrong” David Brunori (Deputy Publisher, State Tax Today) describes the fairness problem with retroactive tax legislation.  In a second article, the monthly interview column “Raising the Bar,” McDermott’s Steve Kranz and Diann L. Smith, Joe Crosby (MultiState Associates) and Kendall Houghton (Alston & Bird LLP) provide details on recent cases addressing retroactive tax changes.

The Council On State Taxation (COST) is also offering a discussion of this issue at its 46th Annual Meeting/Fall Audit Session in Chicago, Illinois (October 20-23, 2015).   McDermott’s Diann L. Smith, Catie Oryl (COST) and Scott Brandman (Baker & McKenzie) will discuss “Retroactive Legislation: Just a ‘Clarification’?”  If you are interested in receiving a copy of the COST outline following the event, please contact Diann at dlsmith@mwe.com.

Governor Andrew Cuomo’s 2015-2016 New York State Executive Budget Bill (Budget Bill) contains several important revenue measures, including, but not limited to, technical corrections to the 2014 overhaul of New York State’s Corporate Franchise Tax, conformity of the New York City General Corporation Tax to the revised New York State Corporate Franchise Tax, and several significant changes to New York’s sales and use tax statutes.  This article will address the Budget Bill’s proposed sales and use tax changes.  Several of these changes, while touted by Governor Cuomo as “closing certain sales and use tax avoidance strategies” are much broader and, if enacted, will have a significant impact on the sales and use tax liabilities resulting from routine corporate and partnership formations and reorganizations.

Read the full article.

On March 31, 2014, Governor Andrew Cuomo signed into law a budget bill containing major corporate tax reform.  That new law resulted in significant changes for many corporate taxpayers, including a complete repeal of Article 32 and changes to the Article 9-A traditional nexus standards, combined reporting provisions, composition of tax bases and computation of tax, apportionment provisions, net operating loss calculation and certain tax credits.  Most of the provisions took effect on January 1, 2015.

Due to the sweeping nature of this corporate tax reform, taxpayers have been awaiting official guidance from the New York State Department of Taxation and Finance on many areas of the reform.  On January 26, 2015, the Department started releasing Technical Memoranda on certain aspects of the corporate tax reform.

The first Technical Memoranda, TSB-M-15(2)C, provides guidance on many transitional compliance issues, including, but not limited to, (1) clarifying the filing requirements for Article 32 and Article 9-A taxpayers with fiscal years that span both 2014 and 2015, (2) addressing the inclusion in a combined report of a member with a tax year end that is different from the designated agent, (3) addressing compliance issues involving short periods and corporate dissolutions, (4) clarifying the filing dates and estimated tax payment obligations for 2015 Article 9-A taxpayers.

The second Technical Memoranda, TSB-M-15(3)C, (3)I, addresses the benefits available to qualified New York manufacturers.

Transitional Compliance Issues

Taxpayers and tax return preparers should be particularly careful when preparing 2015 Article 9-A tax returns, as the Department’s guidance on transitional compliance issues indicates that returns submitted on incorrect forms or on prior year forms will not be processed by the Department and will not be considered timely filed, which could result in the imposition of penalties.

Fiscal Years Spanning 2014 and 2015

The Department’s guidance makes it clear that for any 12-month tax year that began before January 1, 2015, taxpayers must complete the relevant 2014 return (e.g., an Article 32 taxpayer must file a 2014 Article 32 franchise tax return and, if applicable, a MTA surcharge return) according to the Tax Law that was in effect before January 1, 2015.  Fiscal year taxpayers, both Article 32 and Article 9-A, with a 12-month tax year that began in 2014, but will end in 2015, will not be permitted to file short period returns solely as a result of corporate reform.

Combined Reports that Include Taxpayers with Different Year Ends

For tax years beginning on or after January 1, 2015, a taxpayer is required to file a combined report with other corporations engaged in a unitary business with the taxpayer if a more-than-50-percent common ownership (direct or indirect) test is met, with ownership being measured by voting power of capital stock.  Under the Tax Law, a combined report must be filed by the designated agent of the combined group.   The “designated agent” must have nexus with New York and is generally the parent corporation of the combined group.   If there is no such parent corporation or if the parent corporation is not a taxpayer (i.e., it does not have nexus with New York), then another member of the combined group that is a taxpayer may be appointed as the designated agent.  The Department’s new guidance provides, consistent with the Department’s current regulations, that when a member of a combined group has a tax year that differs from that of its designated agent, that member’s tax year ending within the designated agent’s tax year is included in the combined report.  Additionally, the new guidance states that any corporation with a fiscal tax year that begins in 2014 and ends in 2015 cannot be included in a designated agent’s 2015 calendar year combined report, suggesting that the fiscal year taxpayer would need to file a separate report (or, if there are multiple fiscal year filers, a separate combined group) for that transition year.  While not addressed by the guidance, it would seem to follow that a corporation with a fiscal year that spans both 2014 and 2015 also cannot be included in a designated agent’s 2015 fiscal year combined report if the designated agent’s fiscal year begins after January 1, 2015.  This could have an unexpected impact on affected groups’ 2015 tax liability.

Short Tax Years and Corporate Dissolutions

The guidance outlines special filing and extension requirements for taxpayers that dissolve or file short period returns for a tax period that begins after January 1, 2015.  Notably, if a corporation dissolves before the close of a taxable year that, for federal income tax purposes, begins on or after January 1, 2015, and before December 31, 2015, and before the new 2015 tax forms are available, the corporation must make an estimated final tax payment, applying the Tax Law effective January 1, 2015, accompanied by an affidavit of an officer of the corporation that describes, in detail, the calculation of the final tax due and includes a statement affirming the corporation’s duty to file a final return no later than 30 days after the 2015 form has been made available on the Department’s website.

Filing Dates and Estimated Tax Payment Obligations   

The Department’s guidance reminds taxpayers that the Tax Law provisions on filing dates, extension requests and estimated tax payments were not changed as a result of corporate reform.  However, the guidance does address one important area of concern for taxpayers – estimated tax payments.  Given that there are still many areas of uncertainty as a result of corporate tax reform and that the Department has promised guidance in many of those areas, taxpayers have had concerns about making estimated tax payments that would need to reflect new tax provisions that are far from certain.  The Department’s guidance clearly provides that the mandatory first installment of estimated tax payments for a tax year beginning on or after January 1, 2015, is to be paid with the applicable 2014 tax return at the time it is filed or with the applicable extension form.  The mandatory first installment must be based on the tax (or properly estimated tax) shown on the taxpayer’s 2014 filing and does not need to take into account law changes effective for tax years beginning on or after January 1, 2015.  However, a taxpayer’s second, third and fourth installments must take the law changes into account and must be filed by the dates currently set forth in the regulations.

Qualified New York Manufacturers

The Department’s guidance on qualified New York manufacturers summarizes the benefits available to qualified New York manufacturers, namely:

  1. A zero percent tax rate for purposes of computing tax on the entire net income base (for 2014) or the business income base (for 2015 and later);
  2. A reduced tax rate for purposes of computing the tax on the minimum taxable income base for 2014 (this base is eliminated for tax years beginning on or after January 1, 2015);
  3. New reduced tax rates for purposes of computing tax on the capital base (with the capital base tax to be fully phased out for all taxpayers by 2021) and retention of the $350,000 cap on the capital base tax (while the cap was increased to $5 million for other taxpayers);
  4. Lower fixed dollar minimum tax rates; and
  5. A refundable real property tax credit equal to 20 percent of the eligible real property taxes paid during the taxable year (generally taxes paid on property owned (and in some cases leased) by the taxpayer and principally used in manufacturing).

The guidance also reiterates that a corporation or a combined group is a “qualified New York manufacturer” if (1) more than 50 percent of the taxpayer’s or combined group’s gross receipts are from the sale of goods produced by manufacturing activities (e.g., manufacturing, processing, assembling) and (2) it has property meeting the Investment Tax Credit (ITC) requirements located in New York State with an adjusted basis of at least $1 million.  A taxpayer or combined group that fails to meet the receipts test may still be a qualified New York manufacturer if it has at least 2,500 New York manufacturing employees and at least $100 million of manufacturing property in New York.  

In addition to reciting the benefits available to and qualifications for qualified New York manufacturers, the guidance contains some new advice for taxpayers.

First, the guidance surprisingly states that activities of a contract manufacturer cannot be considered by a taxpayer in determining its eligibility as a “manufacturer.”  Notably, the Department has previously ruled, in the context of the investment tax credit, that the activities of a subcontractor can be attributed to a taxpayer for purposes of determining if a taxpayer principally uses eligible property in the production of goods by manufacturing where the taxpayer exercises control and supervision over the manufacturing activities and retains title and the benefits and burdens of ownership for the property used in the manufacturing process.

Second, consistent with the existing authorities, the Department states that a corporation that is a partner in a partnership or member of an LLC must include its distributive share of the partnership or LLC’s receipts and qualified manufacturing property with its own receipts and qualified manufacturing property to determine if it meets the requirements of a qualified manufacturer.

Lastly, the guidance specifically provides that the Department will not issue any advisory opinions on the issue of whether a specific taxpayer or combined group satisfies the requirements to be a qualified New York manufacturer.  While, as a general matter, state revenue authorities do not issue rulings or other definitive advice to taxpayers on factual determinations, the Department’s stance seems somewhat flawed because there are still questions of law that are not answered by this guidance, including the relevant definition of “employee” for purposes of meeting the alternate test.

We thought our Inside SALT readers would enjoy a little diversion during the busy holiday season, so as a thank you to all of our readers and subscribers, we are pleased to present our first-ever Inside SALT Crossword Puzzle Contest.  We hope you’ll enjoy testing your knowledge of key state and local tax developments this year. To enter, please download and print the puzzle by clicking on the image below. After you complete the puzzle, please send it as a PDF file to skranz@mwe.com no later than December 31, 2014, at 11:59 pm EST.  The first eligible entrant to submit a complete and correct puzzle wins a $200 Amazon gift card. The Contest is open to registered Inside SALT email subscribers from the United States and District of Columbia who are age of majority or older.  (To become a subscriber, please enter your email address in the box on the right side of your screen.)  Contest ends at at 11:59 pm EST on December 31, 2014.  Participation is subject to the Official Rules. For complete details, click here to view the Official Rules.)  This Contest is void outside the U.S. and D.C. and where prohibited, restricted or taxed. Please also share your feedback about what topics you would like to hear more about in the comments section below.  We look forward to hearing from you and to bringing you timely SALT updates and analysis in the coming year!  

Earlier this year, New York enacted sweeping corporate tax reform that included a number of special benefits for qualified New York manufacturers.  (For a discussion of this corporate tax reform, see our Special Report.)  Unlike most of the corporate tax reform amendments (which are generally effective for tax years beginning on or after January 1, 2015), some of the benefits for qualified New York manufacturers are effective immediately for tax years beginning on or after January 1, 2014.

The new benefits available to qualified New York manufacturers are:

  1. A 0 percent tax rate for purposes of computing tax on the entire net income base (for 2014) or the business income base (for 2015 and later);
  2. New reduced tax rates for purposes of computing tax on the capital base (with the capital base tax to be fully phased out for all taxpayers by 2021)
    • Retention of the $350,000 cap on the capital base tax (while the cap was increased to  $5 million for other taxpayers);
  3. Lower fixed dollar minimum tax rates; and
  4. A refundable real property tax credit equal to 20 percent of the real property tax paid during the taxable year on property owned (and in some cases leased) by the taxpayer and principally used in manufacturing.

A corporation or a combined group is a “qualified New York manufacturer” if (1) more than 50 percent of the taxpayer’s or combined group’s gross receipts are from qualifying activities (e.g., manufacturing, processing or assembling) and (2) it has property meeting the Investment Tax Credit (ITC) requirements located in New York State with a basis of at least $1 million.  A taxpayer, or combined group, that fails the receipts test may still be a qualified New York manufacturer if it has at least 2,500 New York manufacturing employees and at least $100 million of manufacturing property in New York.

Notwithstanding these tax benefits, the Department’s recently released FAQs highlight a potential negative financial statement consequence for taxpayers with significant deferred tax assets, including New York net operating loss carryforwards.  In the FAQs, the Department confirms that the value of the prior net operation loss conversion subtraction for a qualified New York manufacturer “is $0 due to the 0 % ENI rate.”  In other words, a qualified New York manufacturer cannot carry forward or use its existing net operating loss carryforwards in future years, which may result in negative financial statement consequences.

Qualified New York manufacturers with significant New York credit carryforwards may also suffer a financial statement impact, but the forecast is not as bleak.  They may still have the ability to apply most unused credits against the capital base tax (until it is fully phased out).

Stay tuned for additional guidance regarding qualified New York manufacturers.  The Department is preparing a technical memorandum regarding qualified New York manufacturers that is expected to be released by the end of this year.

A newly passed New Jersey law is interesting both for what it does and for what it does not do.  Assembly bill 3486/Senate bill 2268, attempts to “clarify” four aspects of New Jersey law (retroactively for three of the four!).  The four areas affected by the law change are:  (1) the business/non-business income distinction (called “operational/non-operational income” in New Jersey); (2) a limited partner’s eligibility for a refund of Corporation Business Tax paid on its behalf by a limited partnership; (3) net operating losses involving certain amounts related to bankruptcies, insolvencies, and qualified farm indebtedness; and (4) click-through nexus for sales and use tax purposes.

Business/Non-Business Income Distinction

The distinction between business and non-business income (called “operational” and “non-operational” income in New Jersey) is critical as it determines whether certain income (such as gain from the sale of an asset) can be apportioned among the states or instead much be allocated to only one state.  The law change expands the definition of “operational income” so that many more transactions will result in the generation of apportionable income.  In fact, the law change is estimated to increase revenue by $25 million annually.

Historically, New Jersey’s definition of business (“operational”) income included gain from sale of property “if the acquisition, management, and disposition of the property constitute integral parts of the taxpayer’s regular trade or business operations. . .”  N.J.S.A. 54:10A-6.1(5)(a) (emphasis added).  Use of the conjunction “and” caused New Jersey courts to determine that all three activities (“the acquisition, management, and disposition”) must each have been integral parts of the taxpayer’s regular trade or business in order for the gain from the asset to be apportionable business (“operational”) income.  This could be overcome by demonstrating that one of the activities—usually the disposition of an asset—was not an integral part of a taxpayer’s regular trade or business.

The definition was changed, however, to replace the conjunctive “and” with the disjunctive “or” such that it will now read “the acquisition, management, and or disposition of the property constitute an integral parts of the taxpayer’s regular trade or business operations. . .”  Thus, because engaging in any one (or more) of those three activities as part of a taxpayer’s regular trade or business is sufficient, many more transactions will generate apportionable business income.

This provision takes effect for tax years ending after July 1, 2014.  This means that for a calendar year filer the provision takes effect retroactively for the tax year starting January 1, 2014, since the end of the year (December 1, 2014) is after July 1, 2014.  Interestingly, while the legislation refers to this change as a “clarification,” the fact that it is anticipated to increase revenue by $25 million indicates that it is, indeed, a change of law, reiterating that for the test really is a conjunctive one for prior periods.

Overturning the Result of BIS LP v. Director

There has been (and continues to be) a substantial amount of litigation in New Jersey courts regarding tax payments and tax refunds related to limited partnerships and their out-of-state (“nonresident”) limited partners.  In simplified terms, the historic regime has been that a limited partnership doing business in New Jersey is obligated to pay tax on behalf of certain out-of-state limited partners.  The payments were immediately credited to the limited partner and the limited partner could seek a refund of amounts that reflected an overpayment compared to the limited partner’s actual liability.  If the limited partner had no independent contacts with New Jersey and was not engaged in a unitary relationship with the limited partnership, it could be entitled to a full refund of amounts paid on its behalf.  This could have the effect of 99 percent of a limited partnership’s income escaping New Jersey taxation altogether.

The law change adds the following restrictions:

only a nonresident partner who files a New Jersey tax return and reports income that is subject to tax in this State may apply the tax paid by the partnership and credited to the nonresident partner’s partnership account against the partner’s tax liability; and provided further that a partnership that pays tax pursuant to this section shall not be entitled to claim a refund of payments credited to any of its nonresident partners.  [N.J.S.A. 54:10A-15.11(12)(b).]

In other words, an out-of-state limited partner may seek a refund of taxes paid on the partner’s behalf only if the partner itself is taxable in New Jersey.  But, if the partner itself is taxable in New Jersey, there is a strong chance that it will not be eligible for a refund or at least not for a full refund.  This law change effectively overturns the courts’ decisions in BIS LP, Inc., v. Director, Division of Taxation, 25 N.J. Tax 88 (Tax 2009), affirmed, 26 N.J. Tax 489 (App. Div. 2011), remanded 27 N.J. Tax 58 (Tax 2012), affirmed Dkt. A–1647–12T3 (App. Div. 2014), which allowed an out-of-state non-unitary limited partner to obtain a refund of the Corporation Business Tax paid on its behalf by a limited partnership.

This provision takes effect for tax years ending after July 1, 2014.  This means that for a calendar year filer the provision takes effect retroactively for the tax year starting January 1, 2014, since the end of the year (December 1, 2014) is after July 1, 2014.

This change is expected to generate $40 million of revenue annually.  Again, while the legislation refers to this as a “clarification,” the fact that it is anticipated to increase revenue by $40 million indicates that it is, indeed, a change of law.  As a change, the Division of Taxation’s arguments in matters currently before the courts that take a similar position (i.e., that a refund is only available to partners that are themselves taxable) become suspect.

Limiting Net Operating Losses

The new law requires that any newly generated net operating losses and any previously generated net operating loss carryovers being utilized after the law’s effective date be reduced by any amount excluded from federal taxable income under IRC §§ 108(a)(1)(A), (B) or (C) for debt discharged on account of bankruptcy, insolvency, or qualified farm indebtedness.

This provision takes effect for tax years ending after July 1, 2014.  This means that for a calendar year filer the provision takes effect retroactively for the tax year starting January 1, 2014, since the end of the year (December 1, 2014) is after July 1, 2014.

Adopting Click-Through Nexus

New Jersey has finally adopted a click-through nexus provision, similar to those in many other states, and substantially identical to New York’s provision.  The definition of a seller—that is, one who is required to collect sales tax—will be expanded to include the presumption that an out-of-state seller of taxable goods or services that enters into an agreement with someone physically located in New Jersey, through which the representative is paid to refer customers to the out-of-state seller and where those referrals result in sales in excess of $10,000 during the preceding four quarterly periods, is a obligated to collect sales tax.  The provision applies regardless of whether the payment is commission-based or something else.  The presumption is rebuttable by demonstrating that the in-state representative did not solicit sales in New Jersey on behalf of the out-of-state seller.  The altered definition of seller is effective for sales made starting July 1, 2014 and is forecast to increase tax revenue by $25 million.

Thus, like in many states, the relevant question is whether in-state representatives are actively soliciting sales or are merely advertising on the out-of-state seller’s behalf.  If soliciting, then the seller must register for and collect sales tax; if advertising, then the representative’s activities will not cause the seller to be obligated to collect tax.  But how does one demonstrate that a representative’s activities are mere advertising versus active solicitation?  The best solution will be for the Division of Taxation to—in the very near future, since the law takes effect immediately—publish clear guidelines related to this distinction.  In the meantime, sellers may want to refer to the guidelines provided by the New York State Department of Taxation and Finance related to its click-through law, although these may provide only limited guidance as New York includes some concessions that the Division of Taxation may choose not to make.  For example, while both the New York and New Jersey statutes apply to agreements “for a commission or other consideration,” New York administrative guidance concludes that a per-click fee (that is, the seller pays the representative based on the number of internet hits generated by the representative regardless of whether the clicks result in sales) is indicative of advertising and not of solicitation.

Also helpful to sellers, New York’s guidance details the type of records a seller can maintain (and subsequently provide to the Department upon request) detailing that representatives’ activities were limited to advertising.  These standards—while incredibly burdensome for sellers with many representatives—at least provide some clarity.

Given that the New York and New Jersey laws are substantially similar and are each equally limited by the U.S. Constitution, sellers should consider applying New York’s guidance at least until the Division of Taxation publishes guidance of its own.

Taxpayers resisting audit requests for tax returns filed in other states, or requests for details about the treatment of an item in another state, now have another quill in their arsenal besides the 2010 Oregon Tax Court decision in Oracle Corp. v. Dep’t of Rev., 2010 Ore. Tax LEXIS 32 (Or. T.C. 2-11-10).  The New Jersey Tax Court recently issued a letter opinion in Elan Pharmaceuticals, Inc. v. Director, Division of Taxation, Tax Court Dkt. 010589-2010 (May 1, 2014), reiterating that a taxpayer is not required to treat an item in exactly the same way it treats it in another state.

Like Oracle, Elan Pharmaceuticals involves the business/non-business distinction (called the operational/non-operational distinction in New Jersey vernacular).  Apparently, the company reported its gain from the sale of certain operations as business (i.e., “operational”) income on its California Franchise Tax Return, but reported the same gain as nonbusiness (i.e., “nonoperational”) income on its New Jersey Corporation Business Tax Return.  These facts largely mirror those in Oracle, except that the state involved was Oregon, not New Jersey.

During the Division of Taxation’s audit of the company, the gain was recharacterized as business income, which resulted in a substantial deficiency.  While the Division’s position was based on a number of factors, including its determination that the company never ceased conducting the line of business it purportedly disposed of, the Division was clearly influenced by the company’s treatment of the gain in California.  In fact, the Division asserted that because the company treated the gain as apportionable business income in California, it could not treat it as non-apportionable nonbusiness income elsewhere.

Like the Oregon Tax Court, the New Jersey Tax Court rejected such a purported duty of consistency.  The Court stated that a requirement of consistency, while “appealing under pure common sense, and in light of the purpose of the UDIPTA, . . . does not mean that [the company] is barred from seeking application of New Jersey law when challenging a New Jersey tax assessment.”  The Court continued:  “this court should be guided by N.J.S.A. 54:10A-6.1(a), New Jersey’s basis for taxing operational income, and the binding law construing that statute, not the consequent result of such treatment in another State.”

Ultimately, the Tax Court agreed with the Division of Taxation that the company’s gain was apportionable business income, relying largely on the unitary business principle (an aspect of the matter that appears not to have been fully developed on the record or addressed by the parties during briefing).  Still, the Court’s mandate that the actual treatment of an item in another state not be binding for New Jersey purposes is important.  It’s also entirely consistent with another recent Tax Court decision—Lorillard Licensing Co., LLC v. Director, Division of Taxation, N.J. Tax Ct. Dkt. A-2033-13T1 (Jan. 14, 2014), in which the Tax Court determined that whether or not another state actually imposes income tax on receipts is irrelevant for purposes of computing New Jersey’s now-defunct “throw out rule” so long as the other state would have had the authority to impose an income tax based on New Jersey’s own economic nexus standards.

How can decisions like Oracle, Elan Pharmaceuticals, and even Lorillard, help taxpayers during audits and when establishing reserves for contingent positions?  As a practical matter, these are terrific cases to provide to auditors when the auditor asks how items are treated in other states.  For example, it is quite common for auditors to request a company’s 50-state apportionment worksheet.  Taxpayers often dread this request because it raises precisely the situation addressed in Oracle and Elan Pharmaceutical—that a department of revenue will undermine any favorable positions taken by a taxpayer if the taxpayer took an apparently inconsistent position elsewhere, regardless of the legal or factual basis for the apparent inconsistency.  Of course, a reasonable response is refusal to provide the document on the basis that other states’ treatment of items is entirely irrelevant—and these cases support that defense.  Another approach is to complete the form as if every state imposed the same laws as the requesting state and administered them the same way, being sure to include a statement on the form indicating the approach used.  This method has been effective in a number of state audits.

The cases are also helpful to reference in tax reserve memos and opinions, both when inconsistent positions were actually taken in states and when a liability or benefit being booked relates to an inconsistent position.

Oracle, Elan Pharmaceuticals, and Lorillard are good reminder that companies can—and should—explore all of their options before automatically treating items identically on returns filed throughout the country.  This is true, of course, with the business/non-business distinction as addressed in Oracle and Elan Pharmaceuticals.  But it is also true with respect to other portions of a tax return, such as apportionment.  It is not unusual to find that a slight wording difference in a statute or regulation, or a department of revenue or state court’s interpretations of a statute, provide sufficient basis for taking seemingly contradictory favorable positions.

Governor Andrew Cuomo has signed into law a budget bill containing major corporate tax reform.  This new law results in significant changes for many corporate taxpayers, including a complete repeal of Article 32 and changes to the Article 9-A traditional nexus standards, combined reporting provisions, composition of tax bases and computation of tax, apportionment provisions, net operating loss calculation and certain tax credits.  Most of the provisions discussed in this Special Report will take effect for tax years beginning on or after January 1, 2015.  Corporations should note that this New York State law does not automatically change New York City’s regime, resulting in additional differences between New York State and New York City tax filings.

Read the Special Report here.