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Vermont Considers Imposing Mandatory Worldwide Combined Reporting

The Vermont House Committee on Ways and Means is actively exploring a proposal to become the first state to enact mandatory worldwide combined reporting for corporate income tax purposes. While legislation has not been formally proposed, the Committee has examined a working draft that could be embedded into a broader tax legislation package.

In Committee testimony supporting the adoption of mandatory worldwide combined reporting, Don Griswold, a senior fellow at the Center on Budget and Policy Priorities, argued that multinational corporations “pay huge fees to sophisticated advisers to develop an endless variety of complex schemes that shift their profits offshore.” According to him, mandatory worldwide combined reporting would be “the complete solution” to stopping what he perceives as a “loophole for massive tax avoidance.” He also intimated that several companies are among those he believes are currently engaging in “tax avoidance,” even though he freely acknowledged that he worked in a “Big 4 accounting firm’s 600-person ‘state tax minimization’ group” for most of his career.

On the other hand, at least one representative from the Vermont Department of Taxes has suggested that worldwide mandatory combined reporting is not the panacea that Griswold claims it would be. In Committee testimony, Will Baker, assistant attorney general and general counsel at the Department of Taxes, pointed out that a corporation’s Vermont taxable income could increase or decrease under worldwide combined reporting depending on the profitability of the corporation’s domestic and overseas subsidiaries and the locations of the corporate unitary group’s sales throughout the world. Baker also suggested that the Department of Taxes would face practical challenges calculating the income of subsidiaries that are not part of a corporate filing at the US federal level. Finally, he added that “small states” should generally “have the same rules that other states have” to make it easier for taxpayers to comply with Vermont law.

The McDermott state & local tax team will be closely monitoring this legislative proposal to see whether the Vermont General Assembly takes heed of the advice of its own officials at the Department of Taxes.




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Following Maryland’s Lead? We Guess Everyone Wants to Go to Court. Icy Challenges to Nebraska’s Advertising Services Tax Act Start to Emerge

Nebraska Governor Jim Pillen’s ambitious plan to provide $2 billion in property tax relief via an increase in the sales tax rate and an expansion of the sales tax base is stirring significant debate. Part of his proposal is embodied in the newly introduced Legislative Bills 1310 and 1354, known as the “Advertising Services Tax Act” (the Act), which aims to finance this tax relief by imposing a 7.5% gross revenue tax on advertising services. However, this initiative faces a wall of voter opposition. A recent Battleground Connect survey revealed that 70% of likely voters disapproved of increasing the sales tax rate to offset property taxes. It should come as no surprise that Nebraska voters would not want to follow Maryland’s lead. What is surprising is that Nebraska legislators are willing to tie the fate of their new tax to a law that is currently being challenged in court in Maryland after the state adopted a similar tax in 2021.

The heart of the controversy lies in the new advertising tax’s specifics. The tax only targets firms with US gross advertising receipts exceeding $1 billion, a threshold that effectively discriminates against out-of-state advertising service providers and implicates constitutional and federal laws governing interstate commerce.

The proposed law specifically excludes “news media entities” and targets out-of-state digital advertising platforms. “Advertising services” incorporates a range of services, including digital advertising services, related to advertisement creation and dissemination. The term also includes “online referrals, search engine marketing and lead generation optimization, web campaign planning, the acquisition of advertising space in the Internet media, and the monitoring and evaluation of website traffic for purposes of determining the effectiveness of an advertising campaign.” Advertising services does not include services provided by entities “engaged primarily in the business of news gathering, reporting, or publishing articles or commentary about news, current events, culture, or other matters of public interest.” A news media entity does not include “an entity that is primarily an aggregator or republisher of third-party content.” Taxing publishers of one type of content and not taxing others raises profound First Amendment concerns.

While facially the Act applies to all advertising, its real focus is on digital and internet advertising and this targeting raises multiple legal and policy concerns:

  • Impact on Nebraska Businesses and Consumers. The tax, though imposed largely on out-of-state service providers, will be passed through directly to local businesses when they buy advertising. Much like a sales tax, service providers can and will add a line-item charge of 7.5% on each invoice to the local business placing the advertisement, driving up the cost of advertising services for Nebraska businesses. These higher costs will be reflected in the prices of goods and services sold to Nebraska consumers or the profits of local businesses.
  • Potential for Litigation. Drawing parallels with Maryland’s digital advertising tax, which faced legal challenges and has already once been ruled unconstitutional and barred by federal law, Nebraska’s legislation would also lead to costly and [...]

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As Minnesota Moves Toward GILTI Taxation, New Jersey May Be Moving Away from It

We previously reported that the Minnesota Legislature was considering imposing mandatory worldwide combined reporting through an omnibus tax bill. Subsequent to our report and in the face of numerous criticisms, Minnesota Senate leaders backed away from the proposal. But ominously, those same leaders said they would examine other tax increases to make up for the (potentially hypothetical) revenue left on the table by moving away from mandatory worldwide combined reporting.

After a series of negotiations, an updated omnibus tax bill (HF 1938) emerged from the Minnesota Legislature conference committee over the weekend, which has already been passed by both the Minnesota House and Senate. Most notably for corporate taxpayers, the legislation:

  • Recouples Minnesota with the Internal Revenue Code provision providing for the inclusion of global intangible low-taxed income (GILTI) (under IRC § 951A) in the corporate tax base while providing a 50% dividends received deduction (but no deduction under IRC § 250)
  • Reduces the dividends received deduction from 80% to 50% for corporations in which the recipient owns 20% or more of the stock and from 70% to 40% for corporations in which the recipient owns less than 20% of the stock and
  • Decreases a corporation’s maximum net operating loss deduction from 80% to 70% of taxable net income each year.

As no prior bills proposing these tax increases had been introduced in the Minnesota Legislature, these tax increases have been passed without any public hearing or public testimony. The rush to put these proposals together may explain why the legislation fails to address how income from GILTI must be accounted for in determining a taxpayer’s apportionment factor.

Minnesota’s move toward GILTI taxation is out of step with legislation introduced in New Jersey, which would increase the state’s GILTI deduction to 95% from 50%. The proposal, which is part of a broader legislative compromise package negotiated by New Jersey government officials and businesses, has the support of the chair of the New Jersey Senate Budget and Appropriations Committee and has been publicly called “win-win” legislation by a New Jersey Division of Taxation representative.

As litigation addressing the constitutionality of taxing GILTI is already percolating through administrative appeals in numerous states, it is likely that New Jersey’s potential move away from GILTI taxation will prove to be the more fiscally prudent way to go.




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Be Careful What You Wish For: Minnesota May Be on the Precipice of Enacting Worldwide Combined Reporting at the Worst Possible Time

It has been widely reported that the Minnesota Legislature has advanced an omnibus tax bill that would require the inclusion of the “entire worldwide income” of combined corporate income tax filers engaging in a unitary business. Tax press outlets have made the broad claim that mandatory worldwide combined reporting will “add foreign subsidiaries’ profits” to Minnesota corporate tax returns. But these claims disregard how such a change in Minnesota’s tax regime would also bring worldwide losses into a combined filing group’s income (or loss) calculation. If Minnesota passes mandatory worldwide combined reporting legislation this year and economic expert predictions of an impending global recession come true, the state could see a significant decrease in revenue from its corporate income tax.

Claims that worldwide combined reporting will bring additional profits into the corporate tax base presuppose foreign subsidiaries added to a combined group are always profitable. But if the entities added to a combined group are unprofitable, the opposite would be true. Instead, the foreign entities would either decrease income subject to state corporate income taxation or increase losses that generate net operating loss carryforwards that will decrease state corporate income taxation in future years.

This isn’t just a hypothetical concern. Tax specialists who practiced in the wake of the 2008 global recession recall that states with combined reporting regimes often sought to force unitary groups of corporations to “decombine” in order to remove entities generating losses from the state corporate tax base. When attempts to decombine were unsuccessful (as many were), states were often forced to walk away from large assessments or pay large refunds to corporate taxpayers. Such experiences should serve as a reminder that combined reporting often can decrease a state’s revenues from a corporate income tax. In Minnesota’s case, the potential for lost tax revenues may only balloon if its legislature imposes worldwide combined reporting during a recession.

No state currently has a true mandatory worldwide combined reporting regime (Alaska only imposes it on specific industries), and concerns about bringing foreign loss companies into the combined group is one of many reasons why. If Minnesota were to break state ranks by imposing worldwide combined reporting and a US parent corporation determined the regime could cause its Minnesota taxable income to increase, the corporation would have every incentive to either avoid or decrease connections with the state—potentially causing the state to lose out on capital investments that bring jobs with high wages and benefits.

Further, any attempt to impose mandatory worldwide combined reporting is likely to cause an international backlash, along with potential federal action and litigation challenging Minnesota’s regime. In the immediate wake of a 1983 U.S. Supreme Court decision indicating, to a limited degree, that a state mandatory worldwide combined reporting regime could pass constitutional muster, the US Department of the Treasury completed a study outlining state taxing principles supported by “state, [...]

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Pennsylvania Supreme Court Rules Coupon Amounts Are Not Subtracted from Sales Tax Base Unless Sales Receipt Adequately Describes Taxable Item and Coupon

Overturning a 6-1 en banc decision by the Pennsylvania Commonwealth Court, the Pennsylvania Supreme Court held that a coupon does not reduce the price upon which sales tax must be collected unless the coupon is adequately described and “linked” with the taxable item in accordance with Pennsylvania Department of Revenue (DOR) regulations. The case was brought by a retail customer seeking a sales tax refund on the difference between the retail price of the product and the discounted price as the result of a coupon. The decision instructs retailers on the application of coupon discounts when collecting sales tax. The decision may also provide comfort to retailers facing class action lawsuits in Pennsylvania for collecting sales tax on full invoice prices without taking discounts from coupons into account.

The case examined three transactions between a retailer and customer. In two of the transactions, the customer purchased a single taxable item and used a single coupon. In the other transaction, the customer purchased six taxable items and used five coupons of varying amounts. The receipt provided in each transaction identified each coupon as a “SCANNED COUP” and identified the discount provided with each coupon but did not further describe the coupon nor link the coupon as a discount to any specific item purchased. In all three transactions, the retailer collected sales tax on the full purchase price without taking the coupons into account. The customer sought a sales tax refund from the DOR, maintaining that sales tax should have been collected on the discounted price. The DOR denied the refund claim.

The Pennsylvania Supreme Court agreed with the DOR’s position that under Pennsylvania regulations, “sales tax is owed on the full purchase price” (disregarding any coupons) unless an invoice or receipt (1) separately states and identifies the amount of the taxable item and the coupon and (2) provides a description of both the taxable item and the coupon. Further, the Court agreed that a satisfactory description in the receipt must contain a “linking” element, meaning the coupon must be adequately described to show that it applied to a specific item. The Court explained that such a description on the receipt was necessary because, under Pennsylvania law, “there are discounts or coupons that do not establish a new [taxable] purchase price, such as a discount for shopping on a specific day, discounts from a minimum purchase amount, and sales tax absorption coupons.”

In recent years, state tax departments have been very aggressive in asserting that coupons and discounts do not reduce the sales tax base. This decision serves as a reminder to retailers that the description of coupons on invoices is critical in determining the amount of sales tax to collect. In Pennsylvania, the coupon must be separately identified and “linked” to the taxable product upon which the discount is applied.

This decision highlights the dilemma many retailers face when collecting tax on discounted products: if they collect on the full retail price, they face the potential for customer class action suits [...]

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Tax That DC?!?! FCA Suit on Residency Brings Business Intelligence Company into the Crosshairs

For the first time since the enactment of the False Claims Amendment Act of 2020, the DC Attorney General’s (AG’s) Office has used its new tax enforcement powers to pursue an alleged personal income tax deficiency. This development brings to the forefront a long-simmering constitutional problem with DC’s statutory residency law and offers a stern warning to businesses that assist key employees and executives with their personal tax obligations.

The press rapidly and widely reported on DC’s lawsuit against MicroStrategy Co-Founder, Executive Chairman and former CEO Michael Saylor for alleged evasion of D.C. personal income taxes, which was made public this week. The case alleges that Saylor wrongly claimed that he was a resident of Virginia or Florida (rather than DC) since at least 2012.

The case was originally brought under seal by a relator under DC’s False Claims Act in April 2021—less than one month after the False Claims Amendment Act took effect. Using its new tax authority, the DC AG’s Office filed a complaint last week to intervene (taking over the case going forward). Interestingly, when the DC AG’s Office took over the case, it added MicroStrategy as a defendant under the theory that the company conspired to help Saylor evade DC personal income taxes. Under DC’s False Claims Act, both Saylor and MicroStrategy could be liable for treble damages if a court rules in favor of the DC AG’s Office.

ISSUES WITH DC’S “STATUTORY RESIDENCY” TEST

While determining where an individual is a resident for state and local tax purposes generally requires a fact-intensive analysis, the case against Saylor also implicates DC’s unique (and likely unconstitutional) statutory residency standard. DC’s statute is fundamentally different than statutory residency standards in other states. Most states only tax individuals having their domicile in the state as residents, while some states also have a “statutory residency” test to classify individuals as taxable residents. In most states, a person is classified as a statutory resident if they (1) maintain a permanent place of abode in the jurisdiction and (2) spend more than a specific number of days (typically 183 days) in the jurisdiction.

DC truncates this standard and classifies someone as a statutory resident if they merely maintain a personal place of abode in DC for more than 183 days. Thus, no amount of actual presence of the individual in DC is required. The problem created by this one-of-a-kind standard should be obvious: someone can (as many high-net-worth individuals often do) maintain a residence for 183 days in more than one jurisdiction. Thus, the plain language of the statute would violate the Commerce Clause of the US Constitution because it runs afoul of the internal consistency test. Under this test, a statute is unconstitutional if under a hypothetical situation in which every jurisdiction has the same law as the one being challenged, more than 100% of the tax base would be subject to tax. Here, if every state had a statutory residency test applicable to anyone who had a [...]

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New Mexico Proposes Regulations Addressing Gross Receipts Tax Treatment of Digital Advertising Services

On August 9, 2022, the New Mexico Taxation and Revenue Department published proposed regulations addressing the gross receipts tax (New Mexico’s version of a sales tax) treatment of digital advertising services. The Department states the proposed regulations do not reflect a change in policy but instead ensure the rules are consistent for all advertising platforms.

While the proposed regulations provide some clarity regarding the taxation of digital advertising services under preexisting rules, they introduce several inconsistencies and other gaps, particularly with respect to the finer details of the sourcing provisions. For example, we believe the proposed regulations leave ambiguity regarding whether gross receipts from the provision of digital advertising services should be sourced to:

  1. The purchaser’s address
  2. The server’s location
  3. The viewer’s location

Separately, the proposed regulations would allow a deduction for gross receipts from national or regional advertising. However, the deduction is not allowed if the purchaser is incorporated in or has its principal place of business in New Mexico. While this significantly narrows the base for the tax, it injects complexity by requiring that the seller know the state in which its purchaser is incorporated or has its principal place of business, information not likely available in the context of internet-based advertising platforms.

Collectively, these inconsistencies and lack of clarity could lead to future compliance issues, which we hope will be mitigated as part of the Department’s regulatory approval process.

The Department scheduled a public hearing on the proposed rules for September 8, 2022, at 10:00 am MDT, which also is the due date for submission of written comments. The proposed regulations would be effective upon publication in the New Mexico Register, which could happen as soon as October 11, 2022 (or thereabout).

Please contact the McDermott Will & Emery State & Local Tax team if you have any questions about the potential impact of these proposed regulations on your company. In the meantime, we will be monitoring the regulation approval process and participating in next month’s public hearing.




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Nebraska District Court Holds That GIL 24-19-1 is Not Afforded Deference

Last week, the Lancaster County District Court granted the state’s motion to dismiss in COST v. Nebraska Department of Revenue. COST brought this declaratory judgment action to invalidate GIL 24-19-1, in which the department determined that earnings deemed repatriated under IRC § 965 are not eligible for the state’s dividends-received deduction and are thus subject to Nebraska corporate income tax. COST has until July 19, 2021, to appeal the judge’s decision.

The state’s motion was brought on procedural grounds, one of which was that the GIL is a guidance document and not a “rule” such that a declaratory judgment was not permitted under Nebraska law. COST argued that although the GIL is labeled a guidance document, it is in substance a rule because it establishes a legal standard and explicitly penalizes taxpayers that do not comply. The district court determined that the GIL is not a rule and granted the state’s motion. The district court did not address the substantive issue of whether 965 income is eligible for the dividends received deduction.

While on its face this decision may seem to be a taxpayer loss, the language of the judge’s order suggests otherwise. In finding that the GIL is not a “rule,” the judge determined that the GIL was a mere interpretation of the law that was not binding on the taxpayer and not entitled to any deference by the Nebraska courts. This strengthens an already strong taxpayer case on the merits.

The department’s position that 965 income is not eligible for the dividends-received deduction is inconsistent with the legislative history of the deduction and the nature of 965 income. The fact that a judge stated that this position is now afforded no deference only makes the taxpayer case stronger.

As a practical matter, taxpayers that have appealed assessments on 965 income should consider including the deference argument in their appeals, and taxpayers that have followed the GIL and paid tax on 965 income may consider filing refund claims. The substance of this issue will be litigated one way or another, and the district court’s finding that the GIL is not afforded deference can only help the taxpayer case.




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US Treasury Issues Guidance on the ARPA Claw-Back Provision

Earlier this week, the US Department of the Treasury (Treasury) issued formal guidance regarding the administration of the American Rescue Plan Act of 2021 (ARPA) claw-back provision. The guidance (Interim Final Rule) provides that the claw-back provision is triggered when there is a reduction in net tax revenue caused by changes in law, regulation or interpretation, and the state cannot identify sufficient funds from sources other than federal relief funds to offset the reduction in net tax revenue. The Interim Final Rule recognizes three sources of funds that may offset a net tax revenue reduction other than federal relief funds—organic growth, increases in revenue (e.g., a tax rate increase) and certain spending cuts (i.e., cuts that are not in an area where the recipient government has spent federal relief funds). According to the Treasury, this framework recognizes that money is fungible and “prevents efforts to use Fiscal Recovery Funds to indirectly offset reductions in net tax revenue.”

The Interim Final Rule also provides guidance on what is considered a change in law, regulation or interpretation that could trigger the claw-back (called covered changes), but that point remains somewhat ambiguous. The Rule provides that:

The offset provision is triggered by a reduction in net tax revenue resulting from ‘a change in law, regulation, or administrative interpretation.’ A covered change includes any final legislative or regulatory action, a new or changed administrative interpretation, and the phase-in or taking effect of any statute or rule where the phase-in or taking effect was not prescribed prior to the start of the covered period. [The covered period is March 3, 2021 through December 31, 2024.] Changed administrative interpretations would not include corrections to replace prior inaccurate interpretations; such corrections would instead be treated as changes implementing legislation enacted or regulations issued prior to the covered period; the operative change in those circumstances is the underlying legislation or regulation that occurred prior to the covered period. Moreover, only the changes within the control of the State or territory are considered covered changes. Covered changes do not include a change in rate that is triggered automatically and based on statutory or regulatory criteria in effect prior to the covered period. For example, a state law that sets its earned income tax credit (EITC) at a fixed percentage of the Federal EITC will see its EITC payments automatically increase—and thus its tax revenue reduced—because of the Federal government’s expansion of the EITC in the ARPA. This would not be considered a covered change. In addition, the offset provision applies only to actions for which the change in policy occurs during the covered period; it excludes regulations or other actions that implement a change or law substantively enacted prior to March 3, 2021. Finally, Treasury has determined and previously announced that income tax changes—even those made during the covered period—that simply conform with recent changes in Federal law (including those to conform to recent changes in Federal taxation of unemployment insurance benefits and taxation of loan [...]

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Kansas Decouples from GILTI and 163j

Yesterday afternoon the Kansas legislature overrode Governor Laura Kelly’s veto of Senate Bill (SB) 50, effectively enacting the provisions of the bill into law. Among those are provisions decoupling from certain Tax Cuts and Jobs Act (TCJA) provisions that taxpayers have been advocating for since 2018.

Under the new law, for tax years beginning after December 31, 2020, taxpayers receive a 100% deduction for global intangible low-taxed income (GILTI) included in federal income. Furthermore, the new law is explicit that foreign earnings deemed repatriated and included in federal income under IRC § 965 are considered dividend income and eligible for the state’s 80% dividend-received deduction. The new law also decouples from the interest expense deduction limitation in IRC § 163(j), enacted as part of the TCJA for tax years beginning after December 31, 2020.

A Kansas decoupling bill was first proposed in 2019. Decoupling efforts faced an uphill battle because of the Kansas legislature’s reluctance to pass laws that could be perceived as tax cuts. The 2019 bill was vetoed by Governor Kelly, but that bill was not overridden by the legislature. The STARR Partnership and its members have worked closely with the Kansas Chamber of Commerce on the Kansas decoupling efforts and finally, in this legislative session, advocates were able to persuade the legislature that the decoupling provisions were not tax cuts but provisions designed to prevent a tax increase. This is a great result in Kansas and serves as a welcomed reminder that states that tax GILTI and 965 income (cough, cough, Nebraska) are outliers.




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