The first New York meeting of McDermott’s Tax in the City® initiative in 2018 coincided with the June 21 issuance of the US Supreme Court’s (SCOTUS) highly anticipated Wayfair decision. Just before our meeting, SCOTUS issued its opinion determining that remote sellers that do not have a physical presence in a state can be required to collect sales tax on sales to customers in that state. McDermott SALT partner Diann Smith relayed the decision and its impact on online retailers to a captivated audience. Click here to read McDermott’s insight about the decision.
It’s been nearly three months since the federal tax reform bill (commonly referred to as the Tax Cuts and Jobs Act, or “TCJA”) was enacted and states continue to respond to the various provisions of the TCJA. Recently, there have been notable legislative efforts in New York, Idaho, Iowa and Minnesota.
Starting with the release of the Governor’s Budget Bill in January 2018, the 30-day amendments to that Bill on February 15, and the amendments to the Assembly Bill and Senate Bill this month, there has been much action this legislative session concerning the potential response to federal tax reform. The proposed response in the two latest bills—the Assembly Bill (AB 9509) and the Senate Bill (SB 7509)—is discussed below. Continue Reading More States Respond 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.
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”
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.
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
- 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
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.
While there are differences between the House and Senate tax reform bills that remain to be worked out between the two chambers, both bills are positioned to broaden the tax base and reduce the tax rate. This article highlights the possible impact on state income tax liabilities stemming from the base broadening provisions.