Allocation/Apportionment Archives | Page 6 of 9

2015 D.C. Budget Bill Includes Several Significant Business Tax Changes

by Diann Smith, Eric D. Carstens and Stephen P. Kranz | May 21, 2014 | Allocation/Apportionment, District of Columbia, Income Tax, UDITPA

The FY 2015 District of Columbia Budget Request Act (BRA, Bill 20-749) is currently being reviewed by the D.C. Council after being introduced on April 3 at the request of Mayor Vincent Gray. This year’s Budget Support Act (BSA, Bill 20-750), the supplementary bill implementing changes based on the BRA, contains several significant modifications to the tax provisions of the D.C. Code. The changes include provisions recently recommended by the D.C. Tax Revision Commission (TRC), an independent body created by the Council to evaluate possible changes to tax policy in the District with a focus on broadening the tax base and providing “fairness in tax apportionment.” In particular, the BSA proposes to adopt a single sales factor formula for the apportionment of business income and to reduce business income tax rates (both corporate and unincorporated) from nearly 10 to 9.4 percent. Two additional amendments are pulled directly from the Multistate Tax Commission (MTC) rewrite of the Uniform Division of Income for Tax Purposes Act (UDITPA), including a change to the District’s definition of “sale” and the elimination of cost-of-performance sourcing.

Under the District’s existing apportionment statute, all businesses must apportion business income using a four factor formula consisting of property, payroll and double weighted sales factors. If the BSA is enacted, the statute would be amended to also apportion all business income using a single sales factor. While it is clear that the intent of the BSA provision is to adopt a single sales factor in D.C. going forward, a major ambiguity exists in drafting that would require apportionment using both a single sales and double weighted sales factor formula for taxable years starting after December 31, 2014—which of course is impossible. Thus, without a legislative amendments by the D.C. Council prior to passage on May 28, it is unclear whether the single sales factor formula will be optional or mandatory (as recommended by the TRC) for FY 2015. The budget projection released by Mayor Gray in conjunction with the legislation suggests that the single sales factor would be mandatory, since it is projected that this change would raise an additional $20 million in tax revenue for the District for FY 2015. If the single sales factor were optional, it is unlikely the provision would raise that much revenue.

In addition to statutory modifications to the apportionment formula, the BSA also would reduce the tax rate imposed on corporate and unincorporated businesses from 9.975 percent to 9.4 percent. This is still higher than Maryland (8.25 percent) and Virginia (6 percent).

Picking up where the MTC left off with its ongoing UDITPA rewrite, the District would adopt the MTC draft definition of “sale” to explicitly exclude receipts from hedging transactions and other investment related activity (including the sale, exchange or other disposition of cash or securities).

In addition, BSA would adopt market-based sourcing for sales of intangibles and services, using the language of the MTC draft to do so. The BSA does not pick up the remaining provisions of the MTC [...]

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Show Me the Nonbusiness Income? Missouri Supreme Court Expansively Interprets Functional Test to Conclude Rabbi Trust Income is Business Income

by Mary Kay McCalla Martire | May 19, 2014 | Allocation/Apportionment, Income Tax, Missouri, UDITPA

On April 15, 2014, the Supreme Court of Missouri held that income from a trust used to fund an executive deferred compensation plan (a “rabbi trust”) was apportionable business income. MINACT, Inc. v. Director of Revenue, No. SC93162 (Mo. Apr. 15, 2014). The taxpayer, MINACT, Inc., is a Mississippi-based corporation that contracts with the federal government to manage its education and job training programs.

MINACT reported the trust income as nonbusiness income on its 2007 Missouri corporate income tax return, allocating all the income to Mississippi. The Missouri director of revenue disagreed with the taxpayer and determined that the trust income was business income. MINACT appealed to the Administrative Hearing Commission, which overturned the director’s decision, finding that the trust income was nonbusiness income “because it was ‘not attributable to the acquisition, management, and disposition of property constituting an integral part of MINACT’s regular business. …’” (Opinion at 3.) The director appealed the decision to the Missouri Supreme Court.

The Missouri Supreme Court analyzed whether the trust income was business income under the state’s statutory UDITPA definition of “business income,” which Missouri interprets to include both a transactional and a functional test. (Opinion at 4-5.) See, e.g., ABB C-E Nuclear Power Inc. v. Dir. of Revenue, 215 S.W.3d 85 (Mo. 2007) (income must fail to satisfy both tests to be nonbusiness income). The Supreme Court agreed with the Commission that the trust income was not business income under the transactional test (MINACT earned the income from investing, not from its regular business of managing job training programs), but it found that the income was business income under the functional test because MINACT established its executive deferred compensation plan to attract and retain key employees who were engaged in MINACT’s regular business operations. (Opinion at 5.) The Court cited California and United States Tax Court cases for the notion that “attracting and retaining key employees is an important business purpose” and found that the employees who benefitted from the rabbi trust furthered MINACT’s business by providing capable leadership. (Opinion at 5, 7.) Using this same reasoning, the Court also rejected MINACT’s constitutional challenges.

This is the third ruling of which we are aware finding that income earned from investments in employee-related funds meet the functional test for business income. In Va. Tax Comm’r Ruling, No. 03-60 (Aug. 8, 2003), the Virginia Tax Commissioner held that rabbi trust income as nonbusiness income because “attracting and retaining quality corporate officers is an integral part of the operations of any business . . .” Similarly, in Hoechst Celanese Corp. v. Franchise Tax Bd., 106 Cal. Rptr. 2d 548, 570-71 (Cal. 2001), the California Supreme Court held that income from an employer’s reversion of pension plan assets was business income under the functional test because the employer created the plan to retain and attract employees, which the court found integral to the employer’s business operations.

Alenia Decision May Benefit D.C. Corporate Taxpayers

by Diann Smith and Stephen P. Kranz | May 13, 2014 | Allocation/Apportionment, Constitutional Issues, District of Columbia, Income Tax, Tax Base

The recent decision in Alenia N. America, Inc. v. District of Columbia Office of Tax and Revenue in the District of Columbia Office of Administrative Hearings (OAH) could present opportunities for District taxpayers to receive corporate franchise tax refunds by including their joint ventures’ apportionment factors in the taxpayers’ District apportionment percentage calculation. Alenia N. America v. District of Columbia Office of Tax and Revenue, Dkt. 2012-OTR-00015 (D.C. O.A.H. Mar. 11, 2014).

Through an unwritten, internal policy, the District of Columbia Office of Tax and Revenue (OTR) prohibited separate filers from including the apportionment factors of joint ventures in which a taxpayer was a member/partner in the apportionment percentage calculation while permitting consolidated filers to do so. Alenia N. America challenged this interpretation of the District’s apportionment formula, filing a protest in OAH. Alenia is a separate filer C Corporation headquartered in the District. A portion of Alenia’s 2010 tax year income resulted from its 51 percent ownership in a Mississippi LLC, Global Military Aircraft Systems (GMAS). Because OTR required Alenia to include the income resulting from ownership of GMAS in its apportionable tax base but exclude the apportionment factors of GMAS, Alenia’s District apportionment percentage increased from 55.1899 percent to 86.1993 percent. OTR effectively asserted the power of taxation over income derived from sources outside of the District.

OAH granted a summary decision in favor of Alenia, holding that GMAS’ apportionment factors could be included by Alenia because Alenia and GMAS were unitary and the District’s apportionment statute was designed with the purpose to create uniformity; most states applying formulaic apportionment allow for the inclusion of the apportionment factors (see Homart Development Co. v. Norberg, 529 A.2d 115 (R.I. 1987); Malpass v. Dep’t of Treasury, 494 Mich. 237, 833 N.W.2d 272 (2013)); and factor inclusion was necessary to reflect the source of the GMAS income. Reading the District’s apportionment statute, D.C. Code § 47-1810.02, “consistently with its constitutional underpinnings and its general purpose to promote uniformity” overcame the silence as to whether the inclusion of factors applied to separate filers. OTR’s misinterpretation of District law was “in conflict with the statute.” Alenia, Dkt. 2012-OTR-00015 at *26.

In light of the holding in Alenia allowing for the inclusion of the apportionment factors of joint ventures, taxpayers should consider whether District refunds are now available to them. Further, an argument can be made that the holding in Alenia continues to apply despite the District’s switch to a combined reporting regime because of the court’s insistence that factor inclusion is necessary to reflect the source of the taxpayer’s income.

For a copy of the decision, contact one of the authors.

Inside the New York Budget Bill – Corporate Tax Reform Enacted

by Emily Townsend | Apr 3, 2014 | Allocation/Apportionment, New York, Nexus, Tax Base

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.