States are moving to advance different solutions in their efforts to address federal tax reform. Illinois recently introduced legislation to addback the new deduction for foreign-derived intangible income (a topic we’ve previously covered), and its Department of Revenue has issued its position on other aspects of federal reform. Oregon, after resolving a controversy between its senate and house, is about to pass legislation addressing deemed repatriation income and repealing its tax haven inclusion provisions.

Illinois Issues Guidance on Federal Tax Reform

On March 1, the Illinois Department of Revenue (Department) issued guidance explaining its position with respect to how various law changes made in the 2017 federal tax reform bill, known as the Tax Cuts and Jobs Act (Act), will impact taxpayers in Illinois.

While, for the most part, the pronouncement provides a cursory analysis of the provisions of the Act and a conclusory statement as to whether each provision will result in an increase or decrease in a taxpayer’s adjusted gross income (for individuals) or federal taxable income (for corporations), there are a few items that do warrant some specific mention.

With respect to Illinois’ treatment of the Act’s new international tax provisions, the Department provides some insight into treatment of deemed repatriated foreign earnings and global intangible low-taxed income (GILTI). For purposes of both the deemed repatriated foreign earnings and the GILTI, the Act provides that a taxpayer computes its taxable income by including an amount in income and taking a corresponding deduction to partially offset the inclusion. The Illinois guidance indicates that the inclusion in Illinois will be net, with both the income inclusion and the deduction taken into account in determining a taxpayer’s tax base. This is consistent with the provisions of the Illinois corporate income tax that provide that the Illinois tax base is a corporation’s “taxable income,” which is defined as the amount of “taxable income properly reportable for federal income tax purposes for the taxable year under the provisions of the Internal Revenue Code.” 35 ILCS 5/203(b)(1), (e).

Mitigating the tax impact of these provisions, the Department also takes the position that the amount included as deemed repatriated foreign earnings or as GILTI will be treated as a foreign dividend eligible for Illinois’ 100 percent dividend-received deduction. See 35 ILCS 5/203(b)(2)(O), (b)(2)(G). This rationale is in accordance with the provisions in the Illinois statute that provide a dividend-received deduction for dividends received or deemed received under Internal Revenue Code sections 951 through 965. Thus, because the deemed repatriated foreign earnings are included pursuant to section 965 and the new GILTI is included pursuant to section 951A, those amounts should both be dividends eligible for the dividend-received deduction.

In addition, the Department has specified that the new provision limiting the use of federal net operating losses (NOLs) in an amount equal to 80 percent of the taxpayer’s taxable income is a change that could provide an increased tax base or increased tax revenue to Illinois. Corporate taxpayers should not get confused, however. Illinois allows use of the federal NOL only for individuals. Corporate taxpayers, however, have to add back any federal NOL and then compute a separate NOL for purposes of the Illinois corporate income tax. Thus, neither the 80 percent limitation nor the change to unlimited carryforwards will impact the ability of a corporate taxpayer to use its NOL for purposes of the Illinois corporate income tax.

Nail Biting Success in Oregon on Tax Haven Repeal Following Federal Tax Reform

While drama surrounded Oregon’s legislation addressing aspects of federal tax reform, the end result provides clarity and relief for taxpayers with international affiliates. Oregon has now addressed the repatriation provisions of federal tax reform and is in the process of repealing its (hated) tax haven inclusion provision.

Oregon Senate Bill 1529-A addresses several elements of how the state will conform to federal tax reform. Oregon decided it needed to address reform rapidly because of the risk of a perceived windfall to taxpayers if the state did not change its existing dividend-received deduction statute. Absent the legislation, Oregon would have included both the repatriation addition and the deduction in its tax base and allowed its 80 percent dividend-received deduction against the gross, not the net. The adopted legislation changes this calculation. The legislation requires that amounts deducted for income repatriated under section 965 must be added back in calculating Oregon taxable income. This provision is added to ORS 317.267, the provision decoupling from the federal dividend-received deduction. The tax on the remaining amount would be due in year one, as there is no provision in the bill similar to the federal 8-year payment allowance. It is estimated that the state will receive approximately $160 million from the one-time deemed repatriation. Absent the change, the state would have lost $100 million.

The legislation provides additional relief from the tax on repatriated income. Oregon is one of the states that had adopted tax haven legislation, requiring income of the taxpayer’s affiliates incorporated in certain listed countries to be included in the taxpayer’s taxable income. ORS 317.716. As a result, Oregon may have already taxed some of the income now deemed repatriated. To alleviate any double taxation, new Section 33 in the bill allows a credit for taxes attributable to this income. The credit is limited to the lesser of the tax attributed to the repatriated income or the tax on the income included under ORS 317.716. Unused credits may be carried over five years.

The drama over passage of the bill revolved around a provision that repealed the tax haven inclusion provisions of ORS 317.716. The bill that passed the senate unanimously included the repeal of the tax haven provision. When it reached the house, however, Amendment –A9 removed the repeal. A hearing on the bill included testimony both for and against the repeal. Proponents argued that it was too soon to determine whether repeal was necessary and the tax haven provision should be maintained until the Department of Revenue completed a study to determine whether there was truly overlap between the tax haven inclusion and the GILTI provisions. McDermott provided written comments explaining why maintaining the tax haven provision was duplicative of the policy behind the new GILTI provision and would require complex computations to avoid double taxation when a taxpayer was subject to both GILTI and the tax haven inclusion. COST and the Tax Foundation also provided comments supporting the bill as passed by the senate that included the tax haven repeal language. The house ultimately passed a bill repealing the tax haven provisions, and the senate agreed in conference. The bill is awaiting the governor’s signature.

Under amendments to the bill, the Department of Revenue will have an opportunity to evaluate the efficacy of GILTI, but it is not clear whether the pending budget bill will provide funding for this study.

Please contact us to join McDermott’s multi-state coalition, the STAR Partnership, which will address state business tax ramifications raised by federal tax reform. Further information is available here.

 

A Grain of SALT: March State Focus – New York

On January 19, a New York qui tam complaint was unsealed.  This was unremarkable in and of itself, as there are many qui tam complaints progressing through the courts.  However, what was remarkable was the nature of the suit.  The suit, State of New York ex. rel. Doreen Light v. Myron Melamed, et al., involves a relator alleging that a decedent and his family structured the decedent’s estate to avoid New York personal income and estate taxes.  This is apparently the first estate tax qui tam suit that has been unsealed.  The attorney general declined to intervene in the case.  As per usual, the attorney general declined to comment as to why it did not intervene.

Although an unsealed case where the attorney general declined to intervene is not otherwise remarkable, the case is notable.  It shows that potential relators and their attorneys are looking to expand the tax provisions of the False Claims Act as much as they can.  Even though this case will likely not have an impact on corporate taxpayers, those taxpayers should know that relator’s attorneys are actively looking for cases to bring, and are being creative.  There are no signs, either in the governor’s current proposed budget or otherwise, that the delegation of tax enforcement authority to private citizens is being reconsidered or even restrained.  Taxpayers should be wary.

Top February Hits You May Have Missed

 Connecticut Will Make You Disclose Personal Customer Data!

You’re Invited: COST, Bloomberg Tax and McDermott Will & Emery to Host Post-Oral Argument Roundtable Discussion

Connecticut Responds to the Federal Repatriation Tax

Looking Forward to March

March 6, 2018: Diann Smith will facilitate the “Retail and Hospitality Industry Session” at the Unclaimed Property Professionals Organization Annual Conference in Tampa, FL.

March 7, 2018: Diann Smith will present, and Steve Kranz will serve as the judge, at the interactive and entertaining “Mock Trial”, which will provide a deeper look at an audit that resulted in litigation, at the Unclaimed Property Professionals Organization Annual Conference in Tampa, FL.

March 9, 2018: Alysse McLoughlin will present “State Impacts of Federal Tax Reform” at the Federal Bar Association’s 2018 Tax Law Conference in Washington DC.

March 13, 2018: Alysse McLoughlin and Peter Faber will present “Sales Tax and Miscellaneous Taxes” at Practising Law Institute’s Nuts and Bolts of State and Local Tax 2018 in New York, NY.

March 13, 2018: Peter Faber will presenting “State and Local Taxation of International Business and Mergers & Acquisitions” at Practising Law Institute’s Advanced State and Local Tax 2018 in New York, NY.

March 15, 2018: Catherine Battin, Mary Kay Martire, Alysse McLoughlin and Diann Smith will present a special CLE/CPE on the State and Local Implications of Tax Reform at Tax in the City® in McDermott’s Chicago office.

March 20, 2018: Alysse McLoughlin is presenting “The Kitchen Sink: Unconventional Arguments in Defense of Assertions of Income Tax” at the ABA/IPT Advanced Tax Seminars in New Orleans, LA.

March 23-24, 2018:  Stephen Kranz is presenting “State Implications of Federal Tax Reform” at the National Conference of State Legislatures SALT Task Force meeting in Washington DC.  Congress may have finished its tax overhaul last year, but for state governments, the scramble has just begun.

The 2017 federal tax reform bill, known as the Tax Cuts and Jobs Act (Act), made a number of significant changes to the law, particularly to the international tax provisions of the Internal Revenue Code (IRC). Last month, Illinois joined the growing number of states responding to the Act by proposing legislation purporting to add-back the new federal deduction for foreign-derived intangible income (FDII). The FDII deduction, enacted in sub-part (a)(1)(A) of new IRC section 250, allows US corporate taxpayers a deduction in the amount of 37.5 percent of income earned from the sale of property to a person outside of the US for use outside of the US or the provision of services to a person outside of the US or with respect to property not located in the US. (For tax years beginning 2026, the deduction is reduced to 21.875 percent.)

Senate Bill (SB) 3152 (linked here) proposes an amendment to Section 203(b)(2) of the Illinois Income Tax Act (IITA) that would add back to taxable income the amount of a corporate taxpayer’s FDII deduction allowed under the IRC. Absent this amendment, the FDII deduction likely automatically would be included in Illinois’ corporate tax base: Illinois is a “rolling” conformity state (IITA section 1501(a)(11)), and the FDII deduction is a “special deduction” under the IRC which is incorporated in Illinois’ starting point for taxable income (IITA section 203(b)(1), (e) (For corporations IITA imposed on “taxable income” as defined under the IRC); IRC section 63 (“taxable income” includes “special deductions”)).

SB 3152 has been assigned to the Senate Revenue committee for review. It remains to be seen how, if at all, Illinois will respond to other changes enacted by the federal Act, particularly with respect to the other new international tax provisions, including those related to the deferred foreign earnings transition tax and global intangible low-taxed income, which include both additions and deductions at the federal level.

Due to the current impact and the likelihood that states will consider legislation and agency guidance addressing federal tax reform implications for state business taxes, a united, effective, nationwide advocacy effort is needed to ensure the issues are consistently addressed on a multi-state basis. In preparation for anticipated ramifications, a multi-state coalition will need to consider the subjects summarized below. For further coverage, continue reading here.

How McDermott Will & Emery Can Help You:

  • Formation of a coalition of companies and industry trade organizations dedicated to proactively addressing state tax issues raised by federal tax reform on a nationwide basis
  • Identify and track, in real time, proposed state legislative and regulatory responses to federal tax reform
  • Analyze proposed state reforms and develop substantive amendments and comments
  • Develop and implement advocacy campaigns to secure favorable legislative and regulatory outcomes, including
    • Preparation of all advocacy collateral
    • Organization of on the ground advocacy, including retaining in-state advocates where needed
    • Activating allied organizations to ensure broad support
  • Provide support concerning the proper reporting of state responses to federal tax reform on company financial statements

Coalition Goals: 

  • Prevent state legislation expanding tax base through decoupling from federal deductions
  • Support state legislation adopting comprehensive federal reform conformity, with appropriate deviations
  • Identify and remedy Commerce Clause issues
  • Encourage states revenue department to publish guidance on issues such as definitional questions, apportionment approaches and problems with different group calculations
  • Identify and act on opportunities to address related issues through state responses to federal reform
  • Prepare to address potential nexus changes in response to South Dakota v. Wayfair

Continue Reading McDermott’s Take on State Tax after Reform

Determining financial statement impact from the state flow through of federal tax reform will be complicated by changes in state tax policy expected to be adopted. In our latest Tax Takes video, McDermott’s Steve Kranz and Diann Smith discuss the issues with Joe Henchman, Executive Vice President of the Tax Foundation. The group suggests options for companies to protect against negative policy changes.

New York is the latest state to address certain state tax implications of the 2017 federal tax reform bill, the Tax Cuts and Jobs Act. Governor Andrew Cuomo’s 30-day amendments to the Governor’s Budget Bill were released on February 15 and one piece of the amended Bill explicitly addresses the foreign-earnings, deemed federal repatriation provisions in the new section 965 of the Internal Revenue Code (IRC).

Even before the release of the 30-day amendments, we expected the amount of foreign earnings deemed repatriated and brought into the federal income tax base under IRC § 965 would be considered “other exempt income” under the New York Tax Law and, thus, not subject to tax in New York as long as received from a unitary subsidiary. However, the Governor’s 30-day amendments make it clear that any amount included in the federal tax base under the repatriation transition provisions would be excludable from income, even if such amounts were received from a non-unitary subsidiary. This proposed exclusion for amounts deemed received from non-unitary subsidiaries is an expansion of New York’s usual policy. This expansion, however, would apply only with respect to the deemed repatriation of foreign earnings under IRC § 965.

The 30-day amendments also would make clear the federal deduction permitted under IRC § 965(c) (which facilitates a reduction of the effective federal tax rate on the deemed repatriated foreign earnings) would not be allowed in computing New York taxable income. We expected New York would make this proposed change because disallowing the § 965(c) deduction from New York taxable income would be consistent with excluding the deemed repatriation from taxable income.

Unlike other states, i.e., Connecticut, the Governor’s Bill does not address the amount of expenses attributable to the amount deemed repatriated under IRC § 965 and includable in the New York tax base. The Governor’s Bill would, however, provide that no penalties would be imposed for any failure to make sufficient estimated payments if the short-fall in payments is due to the increase in tax resulting from the inability to deduct such expenses from taxable income.

Please reach out to us with any questions about New York’s proposed treatment of the federal repatriation provisions or other questions about the potential law changes in New York.

Earlier this month, Connecticut Governor Dan Malloy released his Governor’s Bill addressing the various state tax implications of the federal tax reform bill enacted by Congress in December 2017, commonly referred to as the “Tax Cuts and Jobs Act.” Among other things, the Governor’s Bill addresses Connecticut’s treatment of the foreign earning deemed repatriation tax provisions of amended section 965 of the Internal Revenue Code (IRC). While the Governor’s Bill does not explicitly provide that the addition to federal income under IRC section 965 is an actual dividend for purposes of Connecticut’s dividend received deduction, the bill does protect Connecticut’s ability to tax at least part of the income brought into the federal tax base under the federal deemed repatriation tax provisions by defining nondeductible “expenses related to dividends” as 10 percent of the amount of the dividend. Continue Reading Connecticut Responds to the Federal Repatriation Tax

Last year, Illinois enacted a mid-year income tax rate increase. Effective July 1, 2017, Illinois increased the income tax rate for individuals, trusts and estates from 3.75 percent to 4.95 percent, and for corporations from 5.25 percent to 7 percent. The Illinois Personal Property Replacement Tax (imposed on corporations, partnerships, trusts, S corporations and public utilities at various rates) was not changed.

As we previously reported, the Illinois Income Tax Act contains a number of provisions intended to resolve questions regarding how income should be allocated between the two income tax rates applicable in 2017. 35 ILCS 5/202.5(a). The default rule is a proration based on the number of days in each period (181/184). For taxpayers choosing this method, the Department of Revenue (Department) has recommended the use of a blended tax rate to calculate tax liability. A schedule of blended rates is included in the Department’s instructions for the 2017 returns. The blended rate is 4.3549 percent for calendar year individual taxpayers and 6.1322 percent for calendar year C corporation taxpayers. Continue Reading Choices for Illinois Taxpayers in Implementing the 2017 Income Tax Rate Increase

Wrapping Up January – and Looking Forward to February

You can view all of the topics we discussed over the last month here.

Our lawyers will present at the following state and local tax event in February:

February 27, 2018: Diann Smith will be presenting “What’s Trending in State Sales Tax Audit Perspectives: Issues and Trends and Their Proper Reflection” at the 2018 Sales Tax Conference and Audit Session in New Orleans, LA.

On January 10, 2018, a bill was introduced in the Washington State Legislature that would substantially enact the Revised Uniform Unclaimed Property Act (RUUPA) finalized by the Uniform Law Commission (ULC) in late 2016. The bill, House Bill (HB) 2486, is sponsored by Representative Paul Graves at the request of the ULC and would be effective beginning January 1, 2019. The House Committee on Finance conducted a public hearing on the bill on January 16, 2018, but only the sponsor testified and the bill was held for further consideration. While similar (or identical) to RUUPA in most respects, the bill contains a number of significant deviations. Below is a brief summary of several provisions that we flagged in our initial review and the potential impact on Washington holders. Continue Reading Washington Legislature Introduces Revised Uniform Unclaimed Property Act