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New Mexico Administrative Hearings Office Issues Timely Opinion Regarding State Taxation of Subpart F Income and Dividends from Foreign Affiliates

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. (more…)




Arizona’s 2015 TPT Amendments Have 99 Problems, but Origin Sourcing ain’t One

Actually, there are really only two issues, but they are big issues.

Arizona’s Transaction Privilege Tax has always been an anomaly in the traditional state sales tax system.  Contrary to some commentators, however, the recent amendments do not, and could not, impose an origin tax on Arizona retailers for remote sales delivered out-of-state.  That is not to say that these amendments are benign.  Oddly, the amendments provide incentives for Arizona residents shipping items out-of-state to purchase these items over the internet rather than visit Arizona retailers in person.  Furthermore, these amendments create complexities for Arizona vendors shipping to foreign jurisdictions.   Finally, these amendments create additional administrative problems for retailers that are difficult to address with existing software and invite double taxation problems that should not exist in a transaction tax world.

Background: Arizona Transaction Privilege and Use Tax

For retail sales, Arizona, like most states, has two complementary transaction-based taxes, but each tax is imposed on a different entity.  The first tax, the Transaction Privilege Tax (TPT), is imposed directly on the retailer.  Ariz. Rev. Stat. § 42-5001.13.  A retailer will be subject to the TPT on the gross proceeds from a sale if “the location where the sale is made” is Arizona.  Ariz. Rev. Stat. § 42-5034.A.9.  A retailer subject to the TPT is allowed but not required to collect the amount of TPT it owes from its customers.  Ariz. Admin. Code §§ 15-5-2002, 15-5-2210.

The second tax, the Arizona Use Tax, complements and backstops the TPT.  The Use Tax is imposed on the use, storage or consumption in the State of tangible personal property purchased from an out-of-state retailer.  Ariz. Rev. Stat. § 42-5155.  Generally, the purchaser is liable for payment of Use Tax to the State, but a retailer is required to collect Use Tax from a purchaser if the retailer meets the constitutional nexus provisions.  Ariz. Rev. Stat. §§ 42-5155, 42-5160.  Use Tax is imposed only on transactions where TPT has not been imposed, i.e., a transaction is subject to either TPT or Use Tax, but not both.  Ariz. Rev. Stat. § 42-5159.A.1.

The State and its courts have been clear that, while the location of the transfer of title or possession is relevant to the inquiry as to where the sale is made, it is the totality of the retailer’s business activities that identifies the location that may tax the proceeds.  Exactly where that line is drawn, however, is not as clear.  The Arizona Department of Revenue (DOR) has taken the position that, unless an exemption applies, a seller is subject to the tax if a purchaser buys a product at a store, even if the purchaser does not take possession in the state, and the product is shipped to a location outside of the state.  The DOR is apparently taking the position either that the title transfers in the store, which cannot always be the case (a retailer could easily specify that title transfers to the customer outside the store, particularly if the retailer [...]

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