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INSIDE SALT
In-depth coverage of issues surrounding state and local tax
INSIDE SALT
In-depth coverage of issues surrounding state and local tax
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NCSL Task Force on SALT Meets in Anticipation of Active Legislative Sessions

by , and | Jan 17, 2017 | , , , , , , , ,

On Saturday, January 14, the National Conference of State Legislatures (NCSL) Task Force on State and Local Taxation (Task Force) met in Scottsdale, Arizona to discuss many of the key legislative issues that are likely to be considered by states in 2017. The Task Force consists of state legislators and staff from 33 states and serves as an open forum to discuss tax policy issues and trends with legislators and staff from other states, tax practitioners and industry representatives.

Below is a short summary of the key sessions and takeaways from the first Task Force meeting of 2017. PowerPoints from all sessions are available on the Task Force website.

Nexus Expansion Legislation Expected to Continue

With lawsuits pending in South Dakota and Alabama over actions taken by states in 2016, MultiState Associate’s Joe Crosby provided an overview of 2016 nexus expansion legislation (as well as legislation introduced thus far in 2017), with NCSL’s Max Behlke pointing out that he expects a lot of states to act on this trend this year.

In particular, it was pointed out that the US Supreme Court’s denial of cert in DMA v. Brohl (upholding the decision of the 10th Circuit) should give states confidence about their ability to constitutionally adopt similar notice and reporting laws. Last month, Alabama Revenue Commissioner Julie Magee publicly stated that Alabama plans to introduce notice and reporting legislation similar to Colorado, along with at least two other states.

Economic nexus laws directly challenging Quill, similar to South Dakota SB 106 passed last year, are also expected to be prevalent in 2017—with five states (Mississippi, Nebraska, New Mexico, Utah and Wyoming) already introducing bills or formal bill requests that include an economic nexus threshold for sales and use tax purposes. Notably, the Wyoming bill (HB 19) has already advanced through the House Revenue Committee and its first reading by the Committee of the Whole and is expected to receive a final vote in the House this week. The Nebraska bill (LB 44) takes a unique approach in that it would impose Colorado-style notice and reporting requirements on remote sellers that refuse to comply with the economic nexus standard.

Behlke pointed out that he doesn’t see Congress acting on the remote sales tax issue in early 2017 due to other priorities—including federal tax reform. With a final resolution of the kill-Quill efforts by the US Supreme Court most likely not possible until late 2017 (or later), state legislatures are likely to feel the need to take matters into their own hands. From an industry perspective, this presents a host of compliance concerns and requires companies currently not collecting based on Quill to closely monitor state legislation. This is especially true given the fact that many of the bills take effect immediately upon adoption.

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California FTB Schedules Interested Parties Meeting on Short Notice to Discuss Issues in the Regulations on Sourcing Income from Services and Intangibles

by | Jan 5, 2017 | , ,

The California Franchise Tax Board has scheduled an Interested Parties Meeting to discuss proposed changes to its apportionment regulations. Several years ago, when the statute called for sourcing receipts from services and intangibles at the location of income producing activity, based on cost of performance, the FTB, after a series on interested parties meetings, adopted new regulation 25137-14 sourcing receipts for mutual fund service providers and asset management service providers not at the location of the service provider, but at location of customers.  That was good news for California service providers and bad news for out-of-state service providers.

The FTB scheduled on December 22, 2016 an Interested Parties Meeting for January 20, 2017 to discuss a series of issues arising under the new market- based sourcing regulations. A Discussion Topic Paper (attached) was issued on January 3, 2017, and included (1) draft examples of souring income from asset management fees, (2) a discussion of “reasonable approximation”, including who makes that reasonable approximation, (3) clarification of the term “benefit of a service” in several contexts, including timing, government contracts, R&D contracts and patent sales, (4) dividend assignment, (5) a freight forwarding example, (6) interest received from a business entity borrower and (7) marketing intangibles.

The FTB takes these Interested Parties Meetings seriously.  Taxpayers should pay immediate attention to whether any of these issues are of significance to them, and consider participating.



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BREAKING NEWS: No Physical Presence Required for Ohio CAT Imposition

by , and | Nov 17, 2016 | , , , , ,

Today, the Ohio Supreme Court issued its much-anticipated slip opinions in the three companion cases challenging Ohio’s Commercial Activity Tax (CAT) economic nexus standard. See Crutchfield Corp. v. Testa, Slip Op. No. 2016-Ohio-7760; Newegg, Inc. v. Testa, Slip Op. No. 2016-Ohio-7762; and Mason Cos., Inc. v. Testa, Slip Op. No. 2016-Ohio-7768.

In ruling 5-2 in favor of the state, the Ohio Supreme Court first held that physical presence is not a necessary condition for imposing the CAT because the CAT’s $500,000 sales-receipts threshold is adequate quantitative standard that ensures that taxpayer’s nexus with Ohio is substantial under the dormant Commerce Clause. In reaching this conclusion, the court specifically stated that “[o]ur reading of the case law indicates that the physical-presence requirement recognized and preserved by the United States Supreme Court for purposes of use-tax collection does not extend to business-privilege taxes such as the CAT.” (emphasis in original) Note that the court held this was the case regardless of whether the business-privilege tax is measured by income or receipts. In rebuking the taxpayer’s argument that Tyler Pipe affirmatively required some physical presence in the taxing state, the court held that physical presence is a sufficient (but not necessary) condition for imposing a business-privilege tax. See our prior blog on the oral argument for a more detailed description of the Tyler Pipe argument.

Second, the Ohio high court viewed the burdens imposed by the CAT on interstate commerce as not clearly excessive in relation to Ohio’s legitimate interest in imposing the CAT evenhandedly on sales receipts of in-state and out-of-state sellers. Citing these two bases, the Ohio Supreme Court affirmed the Board of Tax Appeals’ (BTA) decisions affirming the CAT assessments against the three appellants. The dissenting opinion viewed Quill as the proper standard for the Ohio CAT, and would have remanded the cases to the BTA for a determination of whether the taxpayer had physical presence.

Practice Note:

These companion cases were viewed by many as a potential vehicle to seek review of the continued viability of the Quill physical presence requirement (as Justice Kennedy called for in his widely-cited DMA concurrence last year). However, the narrow scope of the Ohio Supreme Court’s decision makes it difficult for this case to become the vehicle for the US Supreme Court to review Quill’s continuing viability for sales and use tax nexus.



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SALT Implications of Final Section 385 Debt-Equity Regulations

by | Oct 26, 2016 | , , ,

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.



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SCOTUS Asked to Hear Appeal Involving Constitutionality of Retroactive Tax Legislation

by | Oct 18, 2016 | , , ,

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.  (more…)



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BREAKING NEWS: House Passes Mobile Workforce State Income Tax Simplification Act

by , and | Sep 21, 2016 | , , , ,

Moments ago, the United States House of Representatives (House) passed the Mobile Workforce State Income Tax Simplification Act of 2015 (H.R. 2315) Mobile Workforce State Income Tax Simplification Act of 2015 (H.R. 2315) by voice vote. The Act will now be delivered to the United States Senate (Senate) for introduction and referral to committee for consideration. While the Senate Committee on Finance has not advanced a companion bill (S. 386) introduced by Senators John Thune (R-SD) and Sherrod Brown (D-OH) in February 2015, the bill currently touts 45 co-sponsors.

Background

The Mobile Workforce Act that passed today was introduced in May 2015 by Representatives Mike Bishop (R-MI) and Hank Johnson (D-GA). As highlighted in our prior coverage, the bill advanced out of the House Judiciary Committee in June 2015 by a vote 23-4. This legislation has been introduced in the House by each Congress since it was first introduced in 2006 by the 109th. While the legislation has seen some degree of success in the House, it has yet to advance beyond the Senate Committee on Finance. Notably, in May 2012, a prior version of the Act was passed in the House, but the Senate Committee on Finance did not take it up for consideration.

The Mobile Workforce Act

While the Mobile Workforce Act has been tweaked over the years, its underlying objective has largely remained the same—to providing a workable, national framework for the administration of, and compliance with, the states’ incongruent withholding and nonresident income tax payment laws. The version of the Act passed by the House today establishes a thirty-day safe harbor for traveling employees from nonresident state personal income taxes, and greatly reduces and simplifies the withholding and reporting burdens and related costs to their employers. Specifically, an employee working in a nonresident state for thirty or fewer days would not pay personal income tax to the nonresident state. Instead, the employee would remain fully taxable in its resident state on these earnings.

Under the Act, employers would not be required to withhold taxes in the nonresident state for employees whose travel falls at or below the thirty-day threshold in the state. In making this determination, the Act allows employers to rely on an employee’s annual determination of the time they will spend working in a state, absent fraud or collusion by the employee. The definition of “employee” has the same meaning given to it by the state in which the employment duties are performed, subject to only a few exceptions (including professional athletes, professional entertainers, and public figures who are persons of prominence who perform services for wages or other remuneration on a per-event basis).

As passed today, the “Act shall take effect on January 1 of the [second] year that begins after the date of the enactment of this Act” and retroactive application is expressly prohibited. Practically speaking, this means that the absolute earliest the Act could take effect is January 1, 2018 (assuming the Senate [...]

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Texas Comptroller’s Office Holds Roundtable on Proposed Regulation Targeting IT, Pharmaceutical Industries

by and | Aug 9, 2016 | , , ,

On August 4, 2016, representatives of the Texas Comptroller of Public Accounts held a limited-invite roundtable to discuss the proposed amendments to 34 Tex. Admin. Code 3.584, relating to the reduced rate available under the Texas Franchise Tax for retailers and wholesalers. As previously reported, these proposed revisions were published in the Texas Register on May 20, 2016 and have the potential to double the tax rate for a substantial number of businesses – namely those in the information technology and pharmaceutical industries.

Members of the Comptroller’s office present included Karey Barton, Associate Deputy Comptroller for Tax, Theresa Bostick, Manager of Tax Policy, William Hammer, Special Counsel for Tax and Jennifer Burleson, Assistant General Counsel. Several representatives of businesses and trade groups, along with legal and accounting professionals, were also present.

Ms. Bostick opened the meeting by reiterating the language of the statute and the proposed regulation, and clarifying the application of the proposed regulation’s language. To briefly summarize, the proposed rule provides that a retailer is considered to produce the products it sells (and therefore may be disqualified from the lower Franchise Tax rate available for retailers) if it “acquires the product and makes modifications to the product that increase the sales price of the product by more than 10 percent.” See proposed Rule 3.584(b)(2)(C)(i). A business will also be considered a producer if it “manufactures, develops, or creates tangible personal property that is incorporated into, installed in, or becomes a component part of the product that it sells.” See proposed Rule 3.584(b)(2)(C)(ii). The proposed Rule offers two examples of businesses that will now be considered “producers” rather than retailers: (1) a business that produces a computer program, such as an application or operating system, that is installed in a device that is manufactured by a third party; and (2) a business that produces the active ingredient in a drug that is manufactured by an unrelated party. These proposals represent substantial changes to both the current version of Rule 3.584 and prior Comptroller interpretations of the retailer/producer distinction, and are not supported by the language of the statute that the Rule purports to interpret.

Ms. Bostick explained that the Comptroller had received several comments on the 10 percent rule (some of which were reiterated at the roundtable, including comments that the 10 percent rule should be interpreted as a safe harbor rather than a ceiling and that it should be applied to both modification and development), and that the Comptroller will consider how to define “modification” in the context of Rule 3.584(b)(2)(C)(i) (such language was not provided at the roundtable). She then focused on Rule 3.584(b)(2)(C)(ii) and the examples provided thereunder, explaining that these provisions are meant to convey that if a taxable entity produces (with “development” being equivalent to “production” in this context) tangible personal property that is incorporated into, installed in, or becomes a component part of a product it sells, that business is considered a producer of the product. Because the Comptroller’s representatives view [...]

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Breaking News: Texas Comptroller Publishes Retroactive Rule Targeting IT, Pharmaceutical Retailers; Clock Running on Comment Period

by , and | May 20, 2016 | , ,

On May 20, 2016, the Texas Comptroller of Public Accounts published proposed amendments to 34 Tex. Admin. Code 3.584 – relating to the reduced rate available under the Texas Franchise Tax for retailers and wholesalers – in the Texas Register. As previously reported, these proposed revisions have the potential to double the tax rate for a substantial number of businesses – namely those in the information technology and pharmaceutical industries.

The proposed changes to Rule 3.584 were first circulated as draft amendments to interested parties in April.  Although some interested parties opposed the draft, the official published version has remained unchanged after that initial informal review.  To summarize, entities “primarily engaged in retail or wholesale trade” are subject to a Texas Franchise Tax rate that is half the rate imposed on other businesses – 0.375 percent versus 0.75 percent for reports originally due on or after January 1, 2016.  To qualify for this reduced rate, a business must (among other statutory requirements) earn less than 50 percent of its retail or wholesale trade revenues from the sale of products it or an affiliate entity “produces.”  Tex. Tax Code § 171.002(c).  In a substantial change from the current version of Rule 3.584, the proposed amendments – which have a retroactive effective date of January 1, 2008 – provide that a retailer is considered to produce the products it sells if the business “manufactures, develops, or creates tangible personal property that is incorporated into, installed in, or becomes a component part of the product that it sells.”  See proposed Rule 3.584(b)(2)(C)(ii). The proposed Rule offers two examples of businesses that will now be considered “producers” rather than retailers: (1) a business that produces a computer program, such as an application or operating system, that is installed in a device that is manufactured by a third party; and (2) a business that produces the active ingredient in a drug that is manufactured by an unrelated party.  As discussed in prior coverage, these proposed changes create a regulation that is neither consistent with the language of the statute it purports to interpret nor supported by the common sense understanding of what it means to be a “producer” versus a “retailer.”

Although the proposed changes to Rule 3.584 have the potential to double the tax rate for those retailers and wholesalers who also engage in “development” activities and a retroactivity period of over eight years, the Chief Revenue Estimator, Tom Currah, has determined that “for the first five-year period the rule will be in effect, there will be no significant revenue impact on the state or units of local government” – and there is “no significant anticipated economic cost to individuals who are required to comply with the proposed rule.”  Mr. Currah also has determined that for each year of the first five years the rule is in effect, the anticipated public benefit will be “conforming the rule to current legislation and policy.”  No statement of fiscal implications for small businesses is [...]

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SALT Implications of Proposed Section 385 Debt/Equity Regulations

by | May 18, 2016 | , , , , ,

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.

Read the full article.



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