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Peter L. Faber focuses his practice on corporate and business tax planning and controversy work involving federal, state and local taxes. Peter's state and local tax practice has included tax planning for corporate acquisitions, divestitures and restructurings, combined report planning, electronic commerce and nexus issues, cloud computing issues, residence matters, alternative apportionment issues and a variety of other matters. Read Peter Faber's full bio.

Due to the current impact and the likelihood that states will consider legislation and agency guidance addressing federal tax reform implications for state business taxes, a united, effective, nationwide advocacy effort is needed to ensure the issues are consistently addressed on a multi-state basis. In preparation for anticipated ramifications, a multi-state coalition will need to consider the subjects summarized below. For further coverage, continue reading here.

How McDermott Will & Emery Can Help You:

  • Formation of a coalition of companies and industry trade organizations dedicated to proactively addressing state tax issues raised by federal tax reform on a nationwide basis
  • Identify and track, in real time, proposed state legislative and regulatory responses to federal tax reform
  • Analyze proposed state reforms and develop substantive amendments and comments
  • Develop and implement advocacy campaigns to secure favorable legislative and regulatory outcomes, including
    • Preparation of all advocacy collateral
    • Organization of on the ground advocacy, including retaining in-state advocates where needed
    • Activating allied organizations to ensure broad support
  • Provide support concerning the proper reporting of state responses to federal tax reform on company financial statements

Coalition Goals: 

  • Prevent state legislation expanding tax base through decoupling from federal deductions
  • Support state legislation adopting comprehensive federal reform conformity, with appropriate deviations
  • Identify and remedy Commerce Clause issues
  • Encourage states revenue department to publish guidance on issues such as definitional questions, apportionment approaches and problems with different group calculations
  • Identify and act on opportunities to address related issues through state responses to federal reform
  • Prepare to address potential nexus changes in response to South Dakota v. Wayfair

Continue Reading McDermott’s Take on State Tax after Reform

The federal tax reform legislation is a work in progress, and its final form will undoubtedly be affected by political considerations and lobbying by interested parties. Both the House and Senate bills deserve careful study by taxpayers and their representatives, as many of the provisions will have an effect on state and local taxes.

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Many provisions of the House and Senate tax reform proposals would affect state and local tax regimes. SALT practitioners should monitor the progress of this legislation and consider contacting their state tax administrators and legislative bodies to voice their opinions.

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The White House and Republican congressional leadership released an outline this week to guide forthcoming legislation on federal tax reform. The states conform to the federal tax laws to varying degrees and the extent to which they will adopt any federal changes is uncertain. This memorandum outlines some of the key areas—individual taxation, general business taxation and international taxation— with which the states will be concerned as details continue to unfold.

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The new federal partnership income tax audit rules, scheduled to take effect on January 1, 2018, will have significant implications for the state and local taxation of partnerships and their partners. Most, but not all, states that impose a net income-based tax adopt by reference the federal definition of taxable income, but those that do typically adjust that income to reflect differences between state and federal tax policies. Moreover, state revenue departments generally do not regard themselves as being bound by Internal Revenue Service interpretations of the Internal Revenue Code even when substantive Code provisions are incorporated into state law by reference. The federal statutory rules relating to partnership audits are procedural rules and not ones of substantive tax law, so they will not be automatically adopted by states that generally conform to Internal Revenue Code provisions relating to taxable income. State legislatures may decide to adopt some or all of the federal statutory rules, or they may decide to adopt none of them. Arizona has already adopted its own version of the federal rules, and other state revenue departments are considering recommending to their legislatures that the legislatures take similar action, but most states have not reacted to the federal rules at this time. Continue Reading Implications of Federal Partnership Audit Rules for State and Local Taxation

The recently released final regulations under Internal Revenue Code Section 385, addressing the circumstances under which related company debt will be classified as equity for federal income tax purposes, will have a significant impact on state and local taxes. Federal tax practitioners, as well as state and local tax practitioners, must address their implications.

Read the full article here.

The Supreme Court of the United States has been asked to hear an appeal in a case involving the circumstances in which retroactive tax legislation will be constitutional.

In Dot Foods, Inc. v. State of Washington Department of Revenue, 372 P.3d 747 (Wash. 2016), the Washington State Supreme Court upheld legislation retroactively removing a corporate income tax exemption.  Although the legislature, in justifying its action, said that the retroactive legislation was intended to reflect the legislature’s initial intent, the facts did not bear that out.  The exemption was consciously adopted by the legislature and, indeed, upheld by the Washington Supreme Court when the Department of Revenue attacked Dot Foods’ use of it in an earlier case.  Continue Reading SCOTUS Asked to Hear Appeal Involving Constitutionality of Retroactive Tax Legislation

On April 4, 2016, without warning, the US Department of the Treasury proposed a new set of comprehensive regulations under section 385. There had been no advance indication that regulations were even under consideration. Although the Treasury indicated that the proposed regulations were issued in the context of addressing corporate inversions, their application went well beyond the inversion space and they apply to inter-corporate debt regardless of whether it occurs in an international context. The following is a discussion of the state and local tax consequences of the proposed regulations; for a detailed discussion of the proposed regulations themselves, see this previous article.

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The New York State Department of Taxation and Finance has announced that it would extend the time for certain taxpayers to identify stocks as being held for investment so that income from those stocks would be tax-exempt [TSB M-15(4.1)C, (5.1)I]. Instead of having to make the identification on the date on which the stock is purchased, many corporations will now have a 90-day grace period to make the identification. This relaxation of the identification rules will come as a major relief to many companies that otherwise may have been ambushed by New York’s new rules, particularly out-of-state corporations that start doing business in New York after acquiring investment securities. The announced change is effective immediately.

Under corporate tax reform legislation enacted in 2015, corporations—to treat income from stock held as an investment as tax-exempt investment income—must identify the stock on the date of purchase as being held for investment and follow certain procedures. This requirement has been widely criticized as being unrealistic since a corporation’s investment people are unlikely to know about arcane tax rules on the date that they make trades. Securities dealers, to qualify for tax-free investment income treatment, must identify the stock as being held for investment pursuant to Section 1236 of the Internal Revenue Code (IRC), which requires the identification to be made on the date of purchase. Non-dealers must still make the identification on the date of purchase under the statute, but they need not make the federal election under Section 1236 since that provision applies only to dealers.

The Department’s new rules significantly relax the requirement for many non-dealer corporations. They do not apply to dealers, which will still be subject to the Section 1236 election requirements.

One criticism that has been made of the identification requirement is that a corporation that had not been doing business in New York and, hence, had not been a New York taxpayer and acquired stock as an investment would not have made the New York identification because it would not have cared about, or known about, New York taxes. If such a corporation later starts doing business in New York and becomes subject to New York taxes, it will be too late to make the identification for previously acquired stock and, hence, the income from that stock will not be exempt investment income. Under the Department’s new announcement, a corporation that first becomes a New York taxpayer on or after October 1, 2015, can make the identification within 90 days after becoming a New York taxpayer or, if it became a New York taxpayer before January 7, 2016, by April 6, 2016. Stock purchased after this extended period must still be identified as being held for investment on the date of purchase.

Ordinarily, a corporation becomes taxable in New York on the first day on which it does business, employs capital, owns or leases property, or maintains an office in New York. Under new economic nexus rules, a corporation also becomes taxable in New York on the first day on which it has receipts from the State of $1 million or more. In the case of a corporation that becomes taxable in New York because of the economic nexus receipts requirement, the 90-day period starts with the date on which its receipts first exceed $1 million. This may be hard to calculate because tax managers and investment people may not be aware of the flow of receipts every day. In the case of a unitary group that becomes taxable in the State solely because of the $1 million receipts requirement, the start date for every corporation in the group is the date on which the group in the aggregate first has receipts from New York of $1 million or more. This will require the parent corporation of a unitary group to track the receipts of each of the group’s members.

The application of the identification rules in the corporate acquisition context has been unclear. The new announcement indicates that a corporation whose stock is acquired by a New York taxpayer and, hence, meets the capital stock requirement for being included in a combined return (50 percent) begins the 90-day period on the date on which its stock is acquired. The announcement does not address the question of whether a corporation whose stock is acquired in an IRC Section 338(h)(10) transaction and that elects to have the transaction treated as if it had become a new corporation that purchased its assets from itself must make a new identification. Even though the corporation is the same legal corporate entity, I have been advising clients to make a new identification on the day of closing even if it had made a previous identification because it is treated as a new corporation for many income tax purposes.

A controversial position that has been adopted by the Department is that if a corporate taxpayer invests in an investment partnership and the partnership acquires stock as an investment, the partnership must make the identification. I and others have pointed out that investment partnerships may not know that they have partners that are New York taxpayers and, if the partnership is based outside of New York, it may not know about the New York requirements. We have urged the Department to allow the identification to be made by the corporate partner when it first becomes a partner. The Department has not changed its position in this respect, but it has provided in the new announcement that a partnership that has not itself been doing business in New York, or that has not had corporate partners that were taxable in New York qualifies for the extended 90-day period, starting from the first date on which it does business in New York or has New York receipts of $1 million or more, or from the first date on which it has a partner that is a New York taxpayer. This is still unrealistic, because a partnership that is not otherwise doing business in New York is not likely to know when a corporate partner of the partnership first itself starts doing business in New York and, hence, becomes a New York taxpayer.

For a more detailed discussion of the identification procedures, see Peter L. Faber, “Living With New York’s New Corporate Investment Income Rules,” State Tax Notes, November 2, 2015.

The New York State Department of Taxation and Finance (Department) has just revised its Guide to Sales Tax in New York State, Publication 750.

The Guide will be particularly useful for companies that are just starting to do business in New York State. It provides a well-organized and easy-to-read outline of the steps that should be taken to register as a vendor selling products that are subject to the sales tax and to collecting and remitting taxes. Small businesses and their advisors will find the Guide particularly useful.

The Guide confirms the State’s required adherence to the United States Supreme Court decision in Quill Corp. v. North Dakota (a case in which the taxpayer was represented by McDermott Will & Emery) to the effect that an out-of-state company must have a physical presence in New York to be required to collect use tax on sales to New York customers. It confirms that a company need not collect use tax on sales to New York buyers if its only contact with the State is the delivery of its products into the State by the U.S. Postal Service or a common carrier. It cautions, however, that use tax must be collected if the company has employees, sales persons, independent agents or service representatives located in, or who enter, New York. Although the law has been clear for many years that a sales representative can create nexus for an out-of-state company even though he or she is an independent contractor and not an employee, some companies still seem to be under the mistaken impression that this is not the case. Moreover, although there is no New York authority directly in point, cases in other states have established the principle that nexus can be created by the presence in the state of a single telecommuting employee, even if the employee’s work is not focused on the state.

The Guide contains a cryptic reference to New York’s click-through nexus rule under which an out-of-state company can be compelled to collect use tax on sales to New York purchasers if people in the state refer customers to the company and are compensated for doing so. Such persons are presumed to be soliciting sales for the company and, although the presumption can be rebutted, that will prove to be impossible in the vast majority of cases. The Guide contains cross-references to Department rulings that explain the presumption and the manner in which it can be rebutted, but it would have been helpful if the Guide could have provided more detail about these rules.

One attractive feature of the Guide is that people accessing it online can use links in the Guide to get to relevant rulings.

In addition to the state-wide sales and use tax, special sales taxes that are imposed only within New York City are discussed. These include taxes on credit rating services and certain localized personal services such as those provided by beauty salons, barber shops, tattoo parlors and tanning salons. Interestingly, the Guide does not address the Department’s position that services provided by credit rating agencies in rating debt and preferred stock offerings are taxable. This represents a reversal of a position that the Department had taken in audits for some 40 years. McDermott Will & Emery represented the industry in negotiating the terms of the change of position with the Department. Under the Department’s new position, offerings after September 1, 2015, are subject to the New York City tax if the invoice address of the issuer or representative is in the city.

The Guide discusses the treatment of taxable business purchases. Although one can argue that all purchases by a business that sells products that are subject to the sales tax should be exempt from tax, the law has never so provided and, while there are exemptions for property purchased for resale and for property directly used in manufacturing goods that are sold, the purchases of many items that contribute to the production of taxable items (e.g., computers, furniture, supplies) are subject to the tax, even though their cost is effectively included in the price of the taxable products that the company sells to its customers.

The discussion of the resale exclusion indicates that the exclusion does not apply if “you later use the property or services rather than reselling them.” This does not address the common situation in which property that was purchased and is being held for resale is incidentally used for other purposes. Companies often pledge their inventory as collateral for loans and the Department has never contended that this use defeats the resale exclusion. It would be helpful if the Department issued guidance on the incidental situation.

Companies and their advisors should be aware that the resale exclusion is just that: an exclusion and not an exemption. It is part of the definition of what constitutes a taxable retail sale. This can be important in audits and litigation, because the law is clear that the Department has the burden of persuasion if the issue involves the interpretation of a statute imposing a tax whereas the taxpayer bears this burden in a case involving the application of an exemption. Since the resale exclusion is part of the definition of a taxable retail sale, the burden with respect to its application is on the Department.

The Guide contains a useful section on procedures for filing sales and use tax returns. Although it mentions that a vendor is “a trustee for the state” in connection with the remittance of sales tax that it collects, it does not mention that the responsible persons at a company can be personally liable for sales taxes that are not remitted. This often comes up in audits and it is common for the Department to ask a company’s officers to agree to extend the statute of limitations on collections of delinquent taxes from them personally. We hope that future editions of the Guide will mention this point.

Unfortunately, the Guide does not discuss the many controversial issues involving cloud computing and internet transactions.