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INSIDE SALT
In-depth coverage of legal issues surrounding state and local tax
INSIDE SALT
In-depth coverage of legal issues surrounding state and local tax
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Tax Amnesty Hits the Midwest (and Beyond)

by , and | Jun 12, 2015 | , , , , , , , , , , , , ,

With many state legislatures wrapping up session within the past month or so, there has been a flurry of last-minute tax amnesty legislation passed. Nearly a half-dozen states have authorized upcoming tax amnesty periods. These tax amnesties include a waiver of interest and, in some circumstances, allow taxpayers currently under audit or with an appeal pending to participate. This blog entry highlights the various enactments that have occurred since the authors last covered the upcoming Maryland amnesty program.

Missouri

On April 27, 2015, Governor Jay Nixon signed a bill (HB 384) that creates the first Missouri tax amnesty since 2002. The bill creates a 90-day tax amnesty period scheduled to run from September 1, 2015, to November 30, 2015. The amnesty is limited in scope and applies only to income, sales and use, and corporation franchise taxes. The amnesty allows taxpayers with liabilities accrued before December 31, 2014, to pay in full between September 1, 2015, and November 30, 2015, and be relieved of all penalties and interest associated with the delinquent obligation. Before electing to participate in the amnesty program, taxpayers should be aware that participation will disqualify them from participating in any future Missouri amnesty for the same type of tax. In addition, if a taxpayer fails to comply with Missouri tax law at any time during the eight years following the agreement, the penalties and interest waived under the amnesty will be revoked and become due immediately. Finally, taxpayers who are the subject of civil or criminal state-tax-related investigations, or are currently involved in litigation over the obligation, are not eligible for the amnesty.

According to the fiscal note provided in conjunction with the bill, the state estimates that 340,000 taxpayers will be eligible for the amnesty and that the program will raise $25 million.

Oklahoma

On May 20, 2015, Governor Mary Fallin signed a bill (HB 2236) creating a two-month amnesty period from September 14, 2015, to November 13, 2015. The bill allows taxpayers that pay delinquent taxes (i.e., taxes due for any tax period ending before January 1, 2015) during the amnesty period to receive a waiver of any associated interest, penalties, fines or collection costs.

Taxes eligible for the amnesty include individual and corporate income taxes, withholding taxes, sales and use taxes, gasoline and diesel taxes, gross production and petroleum excise taxes, banking privilege taxes and mixed beverage taxes. Notably, franchise taxes are not included in this year’s amnesty (they were included in the 2008 Oklahoma amnesty).

Indiana

In May, Governor Mike Pence signed a biennial budget bill (HB 1001) that included a provision authorizing the Department of Revenue (Department) to implement an eight-week tax amnesty program before 2017. While the Department must promulgate emergency regulations that will specify exact dates and procedures, several sources have indicated that the amnesty is expected to occur sometime this fall. The upcoming amnesty will mark the second-ever amnesty offered by Indiana (the first occurred in 2005). Taxpayers that participated in the 2005 program [...]

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Arizona ALJ: Remote Provider of Subscription Research Service is the Lessor of Tangible Personal Property

by , and | May 15, 2015 | , , , , , ,

In a curious decision out of Arizona, an Administrative Law Judge (ALJ) found an out-of-state provider of online research services was properly assessed transaction privilege tax (TPT, Arizona’s substitute for a sales tax) based on the logic that the provider was renting tangible personal property to in-state customers.  The Office of Administrative Hearings (OAH) decision, No. 14C-201400197S-REV, available here, should be unsettling for all remote providers of subscription-based services with customers in Arizona.  This decision offers an example of the continued push by states to administratively expand the tax base to include nontaxable digital services.  Many states, like Arizona, do so by considering remote access to digital goods and services to be tangible personal property, as defined by statutes that are decades old.

Facts

The taxpayer was an out-of-state IT research firm offering internally-produced proprietary research and data compilation content remotely.  The taxpayer’s headquarters, offices, servers and platform were all located outside Arizona.  Customers accessed the research material via usernames and passwords received as part of a subscription.  The Arizona Department of Revenue (the Department) determined that the subscription income was subject to the TPT because it was income from the leasing of tangible personal property.  The taxpayer filed a protest with the Department, arguing that the online research services provided make it a service provider—not a lessor of tangible personal property.  The taxpayer noted “at most, [they are] providing clients with a simultaneous license to use.”

Department’s Argument

The Department argued that the taxpayer was leasing tangible personal property (research and data content) through the subscriptions they provide to customers.  Because they had exclusive access and use to the digital content (via username and password), the customers were able to perceive tangible personal property through their sense of sight. Therefore, the taxpayer’s receipts from subscriptions to its research and data content are taxable rental activities subject to the personal property rental classification.

Holding

The ALJ held the taxpayer did not meet its burden of proof of showing the Department misapplied the tax laws.  The decision dismissed all of the taxpayer’s arguments that it is not engaged in leasing tangible personal property.  At the outset, the ALJ found that the inability to control or modify the digital content was not enough to consider the customers to be lacking “exclusive control.”  This is important because the Arizona Supreme Court has made it clear that the scope and application of the personal property rental classification (and its predecessor) hinges on the degree of control over the property in question that is ceded to its putative “lessee” or “renter.” In sum, because the access and use of the proprietary research and data content was offered for a periodic subscription (consideration), such activity is the leasing of tangible personal property, and the assessment by the Department was appropriate.

Analysis

As a threshold matter, it is unclear whether the Department has authority to consider remote access to digital content to be tangible property merely because the content may be viewed on [...]

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District of Columbia’s Transfer Pricing Enforcement Program and Combined Reporting Regime: Taking Two Bites of the Same Apple

by , and | Apr 20, 2015 | , , , , , ,

In his recent article, “A Cursory Analysis of the Impact of Combined Reporting in the District”, Dr. Eric Cook claims that the District of Columbia’s (D.C. or the District) newly implemented combined reporting tax regime is an effective means of increasing tax revenue from corporate taxpayers, but it will have little overlap with D.C.’s ongoing federal-style section 482 tax enforcement.  Dr. Cook is chief executive officer of Chainbridge Software LLC, whose company’s product and services have been utilized by the District to analyze corporations’ inter-company transactions and enforce arm’s length transfer pricing principles.  Combined reporting, (i.e., formulary apportionment, as it is known in international tax circles) and the arm’s length standard, are effectively polar opposites in the treatment of inter-company taxation.  It is inappropriate for the District (and other taxing jurisdictions) to simultaneously pursue both.  To do so seriously risks overtaxing District business taxpayers and questions the coherence of the District’s tax regime.

History

Both combined reporting and 482 adjustments have had a renaissance in the past decade.  Several tax jurisdictions, including the District, enacted new combined reporting requirements to increase tax revenue and combat perceived tax planning by businesses.  At the same time, some tax jurisdictions, once again including the District, have stepped up audit changes based on use of transfer pricing adjustment authority.  This change is due in part to new availability of third-party consultants and the interest in the issue by the Multistate Tax Commission (MTC).  States have engaged consultants, such as Chainbridge, to augment state capabilities in the transfer pricing area.  At the request of some states, the MTC is hoping to launch its Arm’s Length Audit Services (ALAS)[1] program.  States thus have increasing external resources available for transfer-pricing audits.

International Context

A similar discussion regarding how to address inter-company income shifting is occurring at the international level, but with a fundamentally important different conclusion.  The national governments of the Organization for Economic Cooperation and Development (OECD) and the G-20 are preparing to complete (on a more or less consensual basis) their Base Erosion and Profit Shifting action plan.  This plan will reject formulary apportionment as a means of evaluating and taxing inter-company transactions.[2]  Thus, in the international context, formulary apportionment and transfer pricing adjustment authority are not seen as complementary, but instead are seen as mutually exclusive alternatives.  The history of formulary apportionment in international context sheds light on why states make a mistake when they seek to use both combined reporting and transfer pricing adjustments.

A combined reporting basis of taxation seeks to treat the members of a consolidated group as a single entity, consolidating financial accounts of the member entities and allocating a portion of the consolidated income to the taxing jurisdiction based on some formula or one or more apportionment factors.  Under the arm’s length approach, individual entities of a consolidated group within a single jurisdiction are treated (generally) as stand-alone entities and taxed according to the arm’s length value (the value that would be realized by independent, [...]

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Decoding Combination: What Is a Unitary Business

by | Apr 14, 2015 | , , , , , ,

This article is the first of our new series regarding common issues and opportunities associated with combined reporting. Because most states either statutorily require or permit some method of combined reporting, it is important for taxpayers to understand the intricacies of and opportunities in combined reporting statutes and regulations.

In this article, we will explore the foundation for combined reporting – the unitary business principle.

Read the full article.



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Inside the New York Budget Bill: New York City Tax Reform

by | Apr 3, 2015 | , , , ,

The New York Legislature has passed bills related to the 2015–2016 budget (S2009-B/A3009-B and S4610-A/A6721-A, collectively referred to herein as the Budget Bill) containing several significant “technical corrections” to the New York State corporate income tax reform enacted in 2014, along with sales tax provisions and amendments to reform New York City’s General Corporation Tax.  This post is the eighth in a series analyzing the New York Budget Bill, and summarizes the amendments to reform New York City’s General Corporation Tax.

Background

In 2014, New York State enacted sweeping reforms with respect to its taxation of corporations, including eliminating the tax on banking corporations, enacting economic nexus provisions, amending the combined reporting provisions and implementing customer-based sourcing.  New York City’s tax structure, however, was not changed at that time, resulting in concern among taxpayers about having to comply with two completely different sets of rules for New York State and New York City, and concern from representatives of the New York City Department of Finance, who would have lost the benefit of the joint audits that they currently conduct with New York State and the automatic conformity to any New York State audit changes resulting from separately conducted New York State audits.

Although it came down to the wire, the Budget Bill did make the necessary changes to largely conform the New York City corporate franchise tax provisions to those in place for New York State.  These changes will be effective as of January 1, 2015, which is the same general effective date for the New York State corporate tax reform.

Differences Between New York State and City Tax Laws

Even after passage of the Budget Bill, there remain some differences in the tax structures of New York State and New York City.  Some examples include the following:

  • New York State has economic nexus provisions, but New York City does not (except for credit card banks).
  • New York State will phase out its alternative tax on capital (with rate reductions implemented until the rate is 0 percent in 2021; different, lower rates apply for qualified New York manufacturers), and the maximum amount of such tax is capped at $5 million (for corporations that are not qualified New York manufacturers). Not only will New York City not phase out such alternative tax, it has increased the cap to $10 million, less a $10,000 deduction.  Also, New York City will not have a lower cap for manufacturers.
  • Under New York State’s corporate tax reform, a single tax rate is imposed on the business income base for all taxpayers (except for favorable rates for certain taxpayers, such as qualified New York manufacturers), with the amount of such rate being decreased from 7.1 percent to 6.5 percent in 2016. Qualified New York manufacturers are subject to a 0 percent tax rate on the business income base.  In the Budget Bill implementing New York City’s tax reform, there is no similar rate reduction.  Furthermore, instead of using a single rate for all taxpayers (except [...]

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Inside the New York Budget Bill: Net Operating Losses and Investment Tax Credit

by | Apr 3, 2015 | , , ,

The New York Legislature has passed bills related to the 2015–2016 budget (S2009-B/A3009-B and S4610-A/A6721-A, collectively referred to herein as the Budget Bill) containing several significant “technical corrections” to the New York State corporate income tax reform enacted in 2014, along with sales tax provisions and amendments to reform New York City’s General Corporation Tax.  The Budget Bill’s technical corrections to last year’s corporate income tax reform include changes to the economic nexus, tax base and income classification, tax rate (including clarifications to rules applicable to certain taxpayers, such as qualified New York manufacturers), apportionment, combined reporting, net operating loss and tax credit provisions.  The technical corrections are effective on the same date as last year’s corporate income tax reform, which was generally effective for tax years beginning on or after January 1, 2015.

This post is the sixth in a series analyzing the New York Budget Bill, and discusses changes to the net operating loss (NOL) and investment tax credit provisions.

Net Operating Losses – Prior NOL Conversion Subtraction

For tax years beginning on or after January 1, 2015, the calculation of the New York NOL deduction has changed dramatically.  As a result, the Tax Law provides for a transition calculation, a prior NOL Conversion Subtraction, for purposes of computing the allowable deduction for NOLs incurred under the prior law.

To calculate the Conversion Subtraction, the taxpayer first must determine the amount of NOL carryforwards it would have had available for carryover on the last day of the “base year”—December 31, 2014, for calendar year filers, or the last day of the taxpayer’s last taxable year before it is subject to the new law—using the former (i.e., 2014) Tax Law, including all limitations applicable under the former law.  This amount is referred to as the “unabsorbed NOL.”  Second, the taxpayer must determine its apportionment percentage (i.e., its BAP) for that base year (base year BAP), again using the former (i.e., 2014) Tax Law; this is the BAP reported on the taxpayer’s tax report for the base year.  Third, the taxpayer must multiply the amount of its unabsorbed NOL by its base year BAP, then multiply that amount by the tax rate that would have applied to the taxpayer in the base year (base year tax rate).  The resulting amount is divided by 6.5 percent (qualified New York manufacturers use 5.7 percent).  The result of these computations is the prior NOL Conversion Subtraction pool.

A taxpayer’s Conversion Subtraction will equal a portion of its Conversion Subtraction pool computed as outlined above.  The standard rule provides that one-tenth of the Conversion Subtraction pool, plus, in subsequent years, any amount of unused Conversion Subtraction from prior years, may be deducted as the Conversion Subtraction.  The Tax Law as originally drafted also provided that any unused Conversion Subtraction could be carried forward until tax years beginning on or after January 1, 2036 (tax year 2035 for calendar year filers).  The technical corrections include slight changes to that carryforward provision.  Now, any unused Conversion [...]

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Inside the New York Budget Bill: Tax Base and Income Classifications

by | Apr 2, 2015 | , , ,

The New York Legislature has passed bills related to the 2015–2016 budget (S2009-B/A3009-B and S4610-A/A6721-A, collectively referred to herein as the Budget Bill) containing several significant “technical corrections” to the New York State corporate income tax reform enacted in 2014, along with sales tax provisions and amendments to reform New York City’s General Corporation Tax.  The Budget Bill’s technical corrections to last year’s corporate income tax reform include changes to the economic nexus, tax base and income classification, tax rate (including clarifications to rules applicable to certain taxpayers, such as qualified New York manufacturers), apportionment, combined reporting, net operating loss and tax credit provisions.  The technical corrections are effective on the same date as last year’s corporate income tax reform, which was generally effective for tax years beginning on or after January 1, 2015.

This post is the second in a series analyzing the New York Budget Bill, and summarizes the technical corrections to New York’s tax base and income classifications.

Although the modifications are described as “corrections” to last year’s corporate tax reform provisions, the Budget Bill makes a number of substantive changes with respect to the income classification rules.

Investment Capital 

Last year’s corporate tax reform narrowed the definition of investment capital to mean investments in stocks held by a taxpayer for more than six consecutive months but not held for sale to customers in the regular course of business, and excluding stock that is a “qualified financial instrument” for which the taxpayer has elected to use the 8 percent apportionment sourcing rule, stock in a unitary business, stock in a business that is included in a combined report with the taxpayer, and stock issued by the taxpayer.

This year’s Budget Bill further narrows the definition of investment capital by extending the holding period from six months to one year, by tying the definition of investment capital to certain Internal Revenue Code provisions, and by requiring taxpayers to separately identify stock held as investment capital in their books and records.  Investment capital now means investments in stocks that meet the following criteria:

  • Satisfy the definition of a “capital asset” under section 1221 of the Internal Revenue Code at all times the taxpayer owned the stock during the taxable year;
  • Are held for investment for more than one year;
  • The dispositions of which are, or would be, treated by the taxpayer as generating long-term capital gains or losses under the Internal Revenue Code;
  • For stocks acquired on or after January 1, 2015, have never been held for sale to customers in the regular course of business at any time after the close of the day on which they are acquired; and
  • Before the close of the day on which the stock was acquired, are clearly identified in the taxpayer’s books and records as stock held for investment in the same manner as required under section 1236(a)(1) of the Internal Revenue Code for the stock of a dealer in securities to be eligible for capital gain treatment (for [...]

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Louisiana Supreme Court Upholds Bundling Portable Toilet Leases and Cleaning Services, but Not Sure About True Object of Resulting Transactions

by | Mar 16, 2015 | , , , ,

If you are ever waiting in line for portable toilet facilities at the St. Patty’s Day Parade and in need of something to think about, consider the property and service you are about to use: Is it the lease of tangible personal property, the provision of a cleaning and waste removal service, or both? The Supreme Court of Louisiana grappled with this fundamental sales and use tax issue in Pot-O-Gold Rentals, LLC v. City of Baton Rouge, No. 2014-C-2154 (La. Jan. 16, 2015). Approaching the provision of toilets and services as a single transaction and finding the true object to be unclear, the court interpreted the taxing statute narrowly and ruled in favor of the taxpayer. Underlying the opinion is an unusually broad, all-or-nothing bundling approach to the taxability of goods and services provided together.

The City of Baton Rouge taxes the lease of tangible personal property but does not tax the provision of cleaning services. The taxpayer provided both: a customer could lease portable toilets, could purchase toilet cleaning services, or could lease toilets and purchase cleaning services together. There was no question that services alone were nontaxable or that the lease of toilets alone was taxable. The issue was how tax should apply when toilets and cleaning services were provided together. The taxpayer had collected tax on the charges for the toilets but had not collected tax on charges for services in such transactions.

Baton Rouge assessed sales tax on the services where toilets also had been provided. The taxpayer challenged the assessment and won summary judgment in its favor, with the trial court allowing the splitting of the transaction into taxable and nontaxable components. The Court of Appeals reversed, No. 2013 CA 1323 (La. Ct. App. 1st Cir. Sept. 17, 2014), holding that the cleaning service and toilet lease components of combined contracts could not be split and addressed separately. That court then applied the true object test to determine that the entire bundled transaction should be treated as a taxable lease.

The Supreme Court reversed in a per curiam opinion, taking the bundled approach of the Court of Appeals but reaching the opposite conclusion on taxability. The Supreme Court observed that it was unclear whether providing tangible personal property in connection with waste removal services constituted the provision of a nontaxable service, comparing the Louisiana Department of Revenue’s Revenue Rulings 06-012 (Aug. 23, 2006) (providing dumpsters with trash removal service is nontaxable) and 06-013 (Sept. 19, 2006) (providing portable toilets with cleaning services is taxable). Given that the true object of such a transaction was “debatable,” the canon of reading a taxing statute narrowly against the state and in favor of the taxpayer applied: The transaction was nontaxable.

Underlying both the Supreme Court and Court of Appeals opinions was a very broad, all-or-nothing approach to taxability. Where many states would view this type of transaction as a taxable lease of property coupled with nontaxable cleaning services that were not “necessary to complete [...]

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Let the Training Begin: MTC Transfer Pricing Audits Draw Near

by , , and | Mar 6, 2015 | , , , ,

Deputy Executive Director Greg Matson (a nice guy at heart) announced this week that the Multistate Tax Commission (MTC) has hired its first transfer pricing training consultant and is scheduled to begin training state auditors.  The training, titled “Identifying Related Party Issues in Corporate Tax Audits” will be hosted by the North Carolina Department of Revenue from March 31 to April 1, 2015 in Raleigh, North Carolina.  While the much anticipated Arm’s Length Adjustment Service (ALAS, discussed in more depth in our February 6, 2015 blog post, available here) is still pending approval of the MTC Executive Committee and ratification at the annual meeting this summer, it has not stopped MTC officials from moving forward with training state auditors on transfer pricing.  This training (and any subsequent training offered before the annual meeting) will be conducted as part of the MTC’s “regular training” schedule (and is not directly tied to the ALAS program since authority to train for that program has not vested).  Nonetheless, Executive Director Joe Huddleston made it clear in a recent letter to the states that “[t]his course will preview the training to be provided through the Arm’s-Length Adjustment Service.”

The kickoff training session at the end of this month will be conducted by former Internal Revenue Service Office of Chief Counsel senior economic advisor, Ednaldo Silva.  He is the founder of RoyaltyStat LLC, one of the transfer pricing consulting firms that is being considered by the MTC to provide their services for the ALAS.  During yesterday’s teleconference of the ALAS Advisory Group, Matson and Huddleston were optimistic that additional training sessions would be offered by the MTC before the ALAS is finalized.  It remains to be seen whether this training will be offered by Silva or another participant from the October 2014 Advisory Group meeting that has submitted a bid to be the contract firm for the ALAS.  Because these trainings are a fundamental threshold step to commencing ALAS audits (projected to begin December 2015), they provide a strong signal that the MTC is optimistic that they will have sufficient support from the states to continue the ALAS program.

Too Soon?

In a letter distributed to 46 states and Washington, D.C. in February 2015, the MTC officially solicited state commitments to the ALAS program.  States were given until the end of March 2015 to respond.  By the terms of the ALAS proposal, the MTC will need a commitment from at least seven states for the program to move forward.  MTC officials announced at yesterday’s Advisory Group teleconference that the current count is zero (with one state declining).  While there is still time to respond, several revenue department officials voiced concern about making a commitment without more detailed estimates of costs.  Others voiced uncertainty about the ability to enter into a contract for such a long period under state law (the program requests that each state commit to four years).  While there was no significant undertone of opposition to [...]

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Illinois Retailers Beware: Class Action Complaint Filed Against Grocer for Collecting Illinois Sales Tax on Manufacturers’ Coupons Lacking Specific Language

by | Mar 5, 2015 | , ,

A class action complaint was filed in federal court last week against the operator of a grocery chain, alleging failure to deduct manufacturers’ coupons from the tax base on which sales tax was calculated and collected from customers.  This latest attack on a retailer relies on an interpretation of a Department of Revenue regulation that, if correct, would be overly burdensome on Illinois retailers. Other Illinois retailers that accept manufacturers’ coupons may be at risk of being sued in similar actions or may be forced to change their practices.

The Illinois sales tax, the Retailers’ Occupation Tax, is a tax on a retailer’s gross receipts. Store coupons, where a retailer does not receive reimbursement from another party, constitute a reduction in a retailer’s gross receipts and therefore reduce the tax owed. 86 Ill. Admin. Code 130.2125(b)(1). Manufacturers’ coupons, on the other hand, involve reimbursement to a retailer from a third party. This reimbursement constitutes taxable gross receipts. 86 Ill. Admin. Code 130.2025(b)(2). As such, manufacturers’ coupons do not decrease the amount of Retailers’ Occupation Tax owed by the retailer.

An Illinois retailer collects Use Tax from its customer as reimbursement for its Retailers’ Occupation Tax. See 35 ILCS 105/3-45; 86 Ill. Admin. Code 130.101(d). The difficulty with manufacturers’ coupons is that the customer has not paid the entire amount of the retailer’s receipts on which Retailers’ Occupation Tax is due. The Department’s regulation addresses the issue by calling for the customer to assume liability for Use Tax in the fine print of the coupon:

Technically, the coupon issuer … owes the corresponding Use Tax on the value of the coupon.  However, in many cases, the coupon issuer incorporates language into the coupon that requires the bearer … to assume this Use Tax liability.  86 Ill. Admin. Code 130.2025(b)(2).

The theory of the complaint is that the coupon did not contain this language shifting the Use Tax liability, and therefore it was improper of the retailer to collect tax on the coupon amount. If the class action attorneys’ theory is correct, store clerks would be expected to carefully read the fine print of each and every coupon that customers present.  Surely, the Department of Revenue could not have intended such a result.  The complaint seeks compensatory damages, punitive damages of at least 1 percent of the revenue from Illinois stores during years in which violations occurred, and fees and costs. Other retailers may risk similar suits and should consider seeking clarity from the Department of Revenue.



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