On May 8, Governor Bill Lee (R) signed SB 558, which provides for the exclusion of 95% of Global Intangible Low-Taxed Income (GILTI) and foreign earnings deemed repatriated under IRC section 965 (965 Income) from the tax base for tax years beginning on or after January 1, 2018. By enacting this bill, Tennessee joins about
Kathleen Quinn focuses her practice on state and local tax matters. She represents business and individual taxpayers at all stages of state and local tax controversies, including the audit, administrative, and judicial levels. Kathleen also advises clients on state and local tax planning opportunities and the state and local tax consequences of corporate restructurings and other business transactions. Read Kathleen Quinn's full bio.
On April 9, 2018, the New York State Supreme Court granted Starbucks’ motion to dismiss claims that it had failed to collect more than $10 million of sales tax at its New York stores. Lawyers from McDermott’s State and Local Tax (SALT) group and its White Collar and Securities Defense team handled the matter.
Earlier this month, the New Mexico Administrative Hearings Office issued an opinion that addressed the questions on the minds of many state tax professionals in the wake of federal tax reform: under what circumstances can a state constitutionally impose tax on a domestic company’s income from foreign subsidiaries, including Subpart F income, and when is factor representation required? These issues have recently received renewed attention in the state tax world due to the new federal laws providing additions to income for foreign earnings deemed repatriated under Internal Revenue Code (IRC) section 965 and for global intangible low-taxed income (GILTI). Since many state income taxes are based on federal taxable income, inclusion of these new categories of income at the federal level can potentially result in inclusion of this same income at the state level, triggering significant constitutional issues.
In Matter of General Electric Company & Subsidiaries, a New Mexico Hearing Officer determined that the inclusion of dividends and Subpart F income from foreign subsidiaries in General Electric’s state tax base did not violate the Foreign Commerce Clause, even though dividends from domestic affiliates were excluded from the state tax base, because General Electric filed on a consolidated group basis with its domestic affiliates.…
In Health Net Inc. v. Dep’t of Revenue, Docket No. S063625 (Apr. 12, 2018), the Oregon Supreme Court rejected a business taxpayer’s constitutional challenges to a 1993 Oregon statute that eliminated the right to utilize a three-factor apportionment formula in calculating Oregon income tax. The Oregon Supreme Court joined courts in Texas, Minnesota, California and Michigan in rejecting taxpayer arguments that states which have enacted Article IV of the Multistate Tax Compact, thereby incorporating the UDITPA three-factor (payroll, property and sales) formula, have entered into a binding contractual obligation which may not be overridden.
Oregon enacted UDITPA in 1965 (ORS 314.605 – 314.675) and the Multistate Tax Compact (including Article IV) (ORS 305.655), in 1967. In 1993, however, following a series of amendments to the apportionment formula in Oregon’s version of UDITPA, which moved the state to a single sales factor formula, the Oregon legislature eliminated taxpayers’ ability to elect the three factor apportionment formula incorporated via ORS 305.655.
In Health Net, the taxpayer argued that when Oregon enacted the MTC in 1967, it had entered into a binding contract with other states that was violated by the state’s 1993 elimination of the three factor apportionment formula, in violation of the Contract Clause of the state and US constitutions. In Oregon, a statute is considered “a contractual promise only if the legislature has clearly and unmistakably expressed its intent to create a contract.” The Oregon Supreme Court determined that the text, context, and legislative history of ORS 305.655 did not “clearly and unmistakably” establish that the Oregon legislature intended to execute a binding contract with other states. The court found ORS 305.655 to have only created statutory obligations—according to the majority, it was a uniform law, not a compact—and, thus, there was no Contract Clause violation.
Minnesota has several bills pending that would address the Minnesota state tax implications of various provisions of the federal tax reform legislation (commonly referred to as the Tax Cuts and Jobs Act).
HF 2942 was introduced in the House on February 22, 2018. This bill would provide conformity to the Internal Revenue Code (IRC) as of December 31, 2017, including for corporate taxpayers. The bill makes clear that, with respect to the computation of Minnesota net income, the conformity to the Internal Revenue Code as amended through December 31, 2017, would be effective retroactively such that the federal provisions providing for the deemed repatriation of foreign earnings could have implications in Minnesota.…
It’s been nearly three months since the federal tax reform bill (commonly referred to as the Tax Cuts and Jobs Act, or “TCJA”) was enacted and states continue to respond to the various provisions of the TCJA. Recently, there have been notable legislative efforts in New York, Idaho, Iowa and Minnesota.
Starting with the release of the Governor’s Budget Bill in January 2018, the 30-day amendments to that Bill on February 15, and the amendments to the Assembly Bill and Senate Bill this month, there has been much action this legislative session concerning the potential response to federal tax reform. The proposed response in the two latest bills—the Assembly Bill (AB 9509) and the Senate Bill (SB 7509)—is discussed below.…
Virginia and Georgia are two of the latest states to pass laws responding to the federal tax reform passed in December 2017, known as the Tax Cuts and Jobs Act (TCJA). Both states updated their codes to conform to the current Internal Revenue Code (IRC) with some notable exceptions.
On February 22, 2018, and February 23, 2018, the Virginia General Assembly enacted Chapter 14 (SB 230) and Chapter 15 (HB 154) of the 2018 Session Virginia Acts of Assembly, respectively. Before this legislation was enacted, the Virginia Code conformed to the IRC in effect as of December 31, 2016. While the new legislation conforms the Virginia Code to the IRC effective as of February 9, 2018, there are some very notable exceptions. The legislation explicitly provides that the Virginia Code does not conform to most provisions of the TCJA with an exception for “any… provision of the [TCJA] that affects the computation of federal adjusted gross income of individuals or federal taxable income of corporations for taxable years beginning after December 31, 2016 and before January 1, 2018…” Thus, despite Virginia’s update of its IRC conformity date, Virginia largely decouples from the TCJA.…
New York is the latest state to address certain state tax implications of the 2017 federal tax reform bill, the Tax Cuts and Jobs Act. Governor Andrew Cuomo’s 30-day amendments to the Governor’s Budget Bill were released on February 15 and one piece of the amended Bill explicitly addresses the foreign-earnings, deemed federal repatriation provisions…
Earlier this month, Connecticut Governor Dan Malloy released his Governor’s Bill addressing the various state tax implications of the federal tax reform bill enacted by Congress in December 2017, commonly referred to as the “Tax Cuts and Jobs Act.” Among other things, the Governor’s Bill addresses Connecticut’s treatment of the foreign earning deemed repatriation tax provisions of amended section 965 of the Internal Revenue Code (IRC). While the Governor’s Bill does not explicitly provide that the addition to federal income under IRC section 965 is an actual dividend for purposes of Connecticut’s dividend received deduction, the bill does protect Connecticut’s ability to tax at least part of the income brought into the federal tax base under the federal deemed repatriation tax provisions by defining nondeductible “expenses related to dividends” as 10 percent of the amount of the dividend.…
In a recent decision, the New Jersey Tax Court provided some long-awaited guidance on the “unreasonable” exception to the state’s related-party intangible expense add-back provision. In BMC Software, Inc v. Div. of Taxation, No 000403-2012 (2017), the Tax Court held that payments made by a subsidiary to its parent for a software distribution license were intangible expenses that were subject to the add-back provision, but that the statutory exception for “unreasonable” adjustments applied so that the subsidiary was able to deduct the expenses in computing its Corporation Business Tax (CBT). The court first determined that the expense was an intangible expense and not the sale of tangible personal property between the entities because the contract specifically called the fee a royalty, the parent reported the income as royalty income and the parent retained full ownership of the intellectual property rights indicating that no sale had taken place. Thus, the court determined that the intangible expense add-back provision did apply. The most interesting aspect of this case, however, was the court’s application of the “unreasonable” exception to the intangible expense add-back provision because that had not yet been addressed by the courts in New Jersey.
The Tax Court established two critical points with respect to the add-back of related-party intangible expenses: first, that the “unreasonable” exception does not require a showing that the related-party recipient paid CBT on the income from the taxpayer; and secondly, that a showing that the related-party transaction was “substantively equivalent” to a transaction with an unrelated party is sufficient evidence that the add-back is “unreasonable.”…