Earlier this month, the New Mexico Administrative Hearings Office issued an opinion that addressed the questions on the minds of many state tax professionals in the wake of federal tax reform: under what circumstances can a state constitutionally impose tax on a domestic company’s income from foreign subsidiaries, including Subpart F income, and when is factor representation required? These issues have recently received renewed attention in the state tax world due to the new federal laws providing additions to income for foreign earnings deemed repatriated under Internal Revenue Code (IRC) section 965 and for global intangible low-taxed income (GILTI). Since many state income taxes are based on federal taxable income, inclusion of these new categories of income at the federal level can potentially result in inclusion of this same income at the state level, triggering significant constitutional issues.

In Matter of General Electric Company & Subsidiaries, a New Mexico Hearing Officer determined that the inclusion of dividends and Subpart F income from foreign subsidiaries in General Electric’s state tax base did not violate the Foreign Commerce Clause, even though dividends from domestic affiliates were excluded from the state tax base, because General Electric filed on a consolidated group basis with its domestic affiliates. Continue Reading New Mexico Administrative Hearings Office Issues Timely Opinion Regarding State Taxation of Subpart F Income and Dividends from Foreign Affiliates

McDermott hosted the first Tax in the City® meeting of 2018 in its Chicago office on March 15, 2018. Tax in the City® is a discussion and networking group for women in tax aimed at fostering collaboration and mentorship, and facilitating in-person connections and roundtable events around the country.

The Chicago program was one of the best attended Tax in the City® events to date, featuring a CLE/CPE presentation about the State Tax Impacts of Tax Reform by Cate Battin, Alysse McLoughlin and Diann Smith, followed by a discussion of Employee Benefits Impacts of Tax Reform by Diane Morgenthaler. The roundtable portion of the event covered federal tax reform issues, such as effects on partnerships, the GILTI tax, the BEAT tax, followed by an update on South Dakota v. Wayfair, a United States Supreme Court case reexamining the physical presence requirements for state sales tax collection nexus.

Key State & Local Tax Takeaways from Tax in the City® Chicago

  1. Without legislation at the state level, any tax payment impact from the federal repatriation transition provisions will all be concentrated in one year for state tax purposes, as opposed to the federal level where the impact will be spread over eight years.
  1. A company may have a GILTI issue at the state level, even if not at the federal level, because the states don’t take foreign tax credits into account.
  1.  Conforming to GILTI may create unconstitutional discrimination against foreign commerce.
  1.  States and taxpayers need to consider upon which federal return lines the new provisions will appear and how special statements, such as the repatriation statement, will map to state calculations the return and what schedules are used.

The next Tax in the City® meeting will take place in Seattle, WA on May 22. Please reach out to Mia Dubinets at mdubinets@mwe.com if you’d like to be added to the Seattle Tax in the City® mailing list, and receive invitations for the May event.

We invite all tax professionals who identify as female to join Tax in the City® official LinkedIn group to continue the conversation and share tax developments in between events and meetings! Click here to join.

Minnesota has several bills pending that would address the Minnesota state tax implications of various provisions of the federal tax reform legislation (commonly referred to as the Tax Cuts and Jobs Act).

HF 2942

HF 2942 was introduced in the House on February 22, 2018. This bill would provide conformity to the Internal Revenue Code (IRC) as of December 31, 2017, including for corporate taxpayers. The bill makes clear that, with respect to the computation of Minnesota net income, the conformity to the Internal Revenue Code as amended through December 31, 2017, would be effective retroactively such that the federal provisions providing for the deemed repatriation of foreign earnings could have implications in Minnesota. Continue Reading Overview of Minnesota’s Response to Federal Tax Reform

Virginia and Georgia are two of the latest states to pass laws responding to the federal tax reform passed in December 2017, known as the Tax Cuts and Jobs Act (TCJA). Both states updated their codes to conform to the current Internal Revenue Code (IRC) with some notable exceptions.

Virginia

On February 22, 2018, and February 23, 2018, the Virginia General Assembly enacted Chapter 14 (SB 230) and Chapter 15 (HB 154) of the 2018 Session Virginia Acts of Assembly, respectively. Before this legislation was enacted, the Virginia Code conformed to the IRC in effect as of December 31, 2016. While the new legislation conforms the Virginia Code to the IRC effective as of February 9, 2018, there are some very notable exceptions. The legislation explicitly provides that the Virginia Code does not conform to most provisions of the TCJA with an exception for “any… provision of the [TCJA] that affects the computation of federal adjusted gross income of individuals or federal taxable income of corporations for taxable years beginning after December 31, 2016 and before January 1, 2018…” Thus, despite Virginia’s update of its IRC conformity date, Virginia largely decouples from the TCJA. Continue Reading Southeast States Respond to Federal Tax Reform and NJ Senate Leader Talks Tax Surcharge to Limit Corporate “Windfall”

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

On December 19, 2017, DC Councilmember Mary Cheh introduced the District Tax Independence Act of 2017 (Act), which would require the Chief Financial Officer (CFO) to submit a report outlining the steps and amendments necessary to decouple the District’s tax deduction laws from federal law. As introduced, the Act would require this report by no later than April 30, 2018. The Act was referred to the Committee on Finance and Revenue the same day it was introduced and has not been taken up by the committee, which has been dormant since and is not currently scheduled to meet again until the Council returns in late January. The legislation is co-sponsored by Councilmembers Allen, Evans, McDuffie, Bonds, Gray, Nadeau, R. White, Grosso, Silverman, T. White, and Chairman Mendelson. Notably, all members of the Committee on Finance and Revenue—including Chairman Evans—are co-sponsors. Practice Note The introduction of the Act signals the Council’s overwhelming disapproval of the federal tax reform enacted by Congress and signed by President Trump on December 22, 2017. This is a process that is likely to take place across the country as states begin to assess the revenue impact of the federal tax reform legislation on their state corporate income and franchise tax regime. The District currently conforms to many federal deductions on a rolling basis for purposes of the Franchise Tax, which is imposed on both corporations and unincorporated entities. See generally DC Code Ann. § 47-1803.03. As part of the decoupling process, the CFO and Council will need to determine which deductions to alter to avoid a significant revenue loss and what the DC treatment should be. Furthermore, the CFO and Council should consider which deductions are necessary to retain due to related increases to the federal tax base, which DC utilizes as the starting point for Franchise Tax purposes. The effective dates and relation to 2017 return deadlines will be critical to monitor as this process moves forward, as several portions of the federal tax reform are effective for the 2017 tax year—meaning the corresponding District changes (if any) will need to be retroactive since returns (absent extensions) are due before the CFO’s report to the Council is. DC taxpayers with specific questions on how this process may impact their Franchise Tax liability in 2017 and going forward are encouraged to contact the authors.

McDermott extended its popular Tax in the City® program to Seattle, with a meeting on October 12 at the Amazon headquarters. McDermott established Tax in the City® in 2014 as a discussion and networking group for women in tax aimed to foster collaboration and mentorship, and to facilitate in-person connections and roundtable events around the country. The Seattle program was one of the best attended Tax in the City® events to date, featuring a CLE/CPE presentation about Privilege and the Ethics of Social Media by Cate Battin, Kristen Hazel and Jane May, followed by a roundtable discussion in which Elizabeth Chao and Sandra McGill discussed international issues related to income from digital products. Britt Haxton and Kristen Hazel discussed planning considerations related to federal tax reform, and Diann Smith provided the state and local tax considerations related to both issues. Continue Reading Inaugural Seattle Tax in the City® | Highlights and Takeaways

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.

Continue Reading NCSL Task Force on SALT Meets in Anticipation of Active Legislative Sessions