Nexus Archives | Page 8 of 13

Allied Domecq: Nexus-Combined Reporting

by Diann Smith and Stephen P. Kranz | Jul 16, 2014 | Constitutional Issues, Income Tax, Massachusetts, Nexus

In Allied Domecq Spirits & Wines USA, Inc. v. Commissioner of Revenue, the Massachusetts Court of Appeals held that the parent company of a Massachusetts taxpayer could not be included in the taxpayer’s Massachusetts nexus-combined returns because the parent’s nexus with Massachusetts was a sham. Regardless of the validity of the parent’s presence in the state, an argument exists that the nexus limitation on filing combined returns as it existed during the tax years discriminated against interstate commerce in violation of the Commerce Clause.

The parent company, ADNAC, was incorporated in Delaware and headquartered in Canada. ADNAC carried substantial losses. Beginning in August 1996, ADNAC engaged in activities to create a Massachusetts presence, such as reimbursing an affiliate with Massachusetts nexus for the salaries of insurance and tax employees and renting Massachusetts office space from the affiliate to house the employees. Further, ADNAC’s Massachusetts’ affiliate transferred three internal audit department employees working in Massachusetts to ADNAC. For the years in question, 1996 – 2004, Massachusetts required corporations to have in-state nexus in order to file combined reports and share losses with affiliated entities. Mass. Gen. Laws ch. 63, § 32B. As a result of these transactions, the taxpayer believed ADNAC had established nexus with Massachusetts and included ADNAC in its Massachusetts combined returns.

The Massachusetts Court of Appeals held that, because of the sham transaction doctrine, ADNAC did not have nexus with Massachusetts for tax purposes and could not file on a combined basis in the state. The court ruled, in part, that the transactions involving insurance and tax employees were shams because two memos developed by the taxpayer’s tax department described the plan as a “state tax planning project,” indicated the favorable tax consequences of the transaction, and stated that the plan would have “no impact to the management results.” The court viewed these communications as the taxpayer admitting that the transactions involving tax and insurance employees were conceived of entirely for tax planning purposes and for no business purpose. While the court could not point to any documents stating a tax purpose behind the movement of the internal audit department employees to Massachusetts, the court decided that because no contemporaneous records indicated a business motivation, the court would grant the use of the sham transaction doctrine.

Practice Note: The taxpayer did not argue that Massachusetts’ requirement of in-state nexus to file on a combined basis discriminated against interstate commerce and violated the Commerce Clause. Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977). Allied Domecq is similar to USX Corporation v. Revenue Cabinet, Kentucky, in which a Kentucky Circuit Court declared that a provision of Kentucky’s capital stock tax that limited to domestic corporations the ability to file on a combined basis or exclude investments in subsidiaries from its tax base discriminated against interstate commerce. USX Corp. v. Revenue Cabinet, No. 91-CI-01864 (Ky. Cir. Ct. 1992); see also Hellerstein & Hellerstein, State Taxation 4.14[3][j] (Thomson Reuters/Tax & Accounting, 3rd ed. 2001 & Supp. 2014-1). The court held [...]

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New Jersey’s New Laws — Retroactive for Most Companies

by Emily Townsend | Jul 7, 2014 | Allocation/Apportionment, New Jersey, Nexus, Sales Tax

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 [...]

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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.

U.S. Supreme Court Denies Certiorari to Review New York’s Click-Through Nexus Law

by Mary Kay McCalla Martire and Stephen P. Kranz | Dec 5, 2013 | New York, Nexus, Sales Tax

The U.S. Supreme Court has declined to consider the constitutionality of New York’s “Amazon” click-through sales tax nexus law, leaving it in effect and emboldening other states’ similar efforts. Unless federal legislation is enacted, interstate retailers are facing an era of unprecedented uncertainty as states seek to apply their new laws to compel tax collection by out-of-state retailers.

Read the full article.

New Jersey Tax Court Issues Important Order on the State’s Throw Out Rule

by Arthur R. Rosen and McDermott Will & Emery | Sep 9, 2013 | New Jersey, Nexus, Sales Tax

The Tax Court of New Jersey recently issued an important order that may have eviscerated the impact of the Throw Out Rule on intangibles holding companies. On its face the order does not appear to address the application of the Throw Out Rule to traditional operating businesses, however the “bottom line” of the order should be applicable to all businesses.

Read the full article.