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Wrapping Up August – and Looking Forward to September

Upcoming McDermott Will & Emery SALT Activities in September:

September 14, 2017: Robin Greenhouse, Kristen Hazel, Sandra McGill and Alysse McLoughlin will be speaking at McDermott Will & Emery’s Tax in the City®: A Women’s Tax Roundtable meeting in New York City about local tax updates and ethics.

September 15, 2017: Jane Wells May is speaking in Austin, TX at the ABA Tax Section Meeting about “False Claims Acts and State Taxes.”

September 18, 2017: Mary Kay Martire is speaking in San Antonio, TX at the 2017 IPT Sales Tax Symposium about “Third Party Tax Enforcement Actions.”

September 19, 2017: Arthur Rosen is speaking in San Antonio, TX at the 2017 IPT Sales Tax Symposium about sales tax nexus –“Son of Quill: The Sequel.”

September 19, 2017: Stephen Kranz is speaking in San Antonio, TX at the 2017 IPT Sales Tax Symposium about uncollectible debts – “Breaking Bad from Bad Debt.”

September 26, 2017: Cate Battin and Mary Kay Martire are presenting a “National Update on Key SALT Issues” in Rolling Meadows, IL, at the 18th Annual SALT Conference of the Taxpayers Federation of Illinois.

September 28, 2017: Eric Carstens and Nick Furtwengler will be speaking at the TEI Emerging Tax Professionals Seminar, taking place in McDermott’s Chicago, IL office, about the SALT portions of “Acquiring or Expanding a Business,” “Integration and Compliance” and “The Audit Notice Arrives: Now What?”

Wrapping up August:

Our August 2017 blog posts are available on insideSALT.com, or read each article by clicking on the titles below. To receive the latest on state and local tax news and commentary directly in your inbox as they are posted, click here to subscribe to our email list.

August 1, 2017: Implications of Federal Partnership Audit Rules for State and Local Taxation

August 8, 2017: MTC Offers 18 State Marketplace Seller Amnesty Initiative

August 14, 2017: Resistance is not Always Futile: New Decision in Ongoing Delaware Unclaimed Property Audit Litigation

August 15, 2017: Illinois Court Upholds Cook County’s Beverage Tax Finding It Passes Constitutional Muster and Related Developments

August 16, 2017: Delaware (Re)Proposes Unclaimed Property Reporting and Examination Manual Regulation

August 18, 2017: MTC Marketplace Seller Voluntary Disclosure Initiative Underway




MTC Marketplace Seller Voluntary Disclosure Initiative Underway

Yesterday, the application period opened for the limited-time MTC Marketplace Seller Voluntary Disclosure Initiative opened and it will close October 17, 2017. Since our last blog post on the topic detailing the initiatives terms, benefits and application procedure, six additional states (listed below) have signed on to participate in varying capacities. The lookback period being offered by each of the six states that joined this week is described below.

  1. District of Columbia: will consider granting shorter or no lookback period for applications received under this initiative on a case by case basis. DC’s standard lookback period is 3 years for sales/use and income/franchise tax.
  2. Massachusetts: requires compliance with its standard 3-year lookback period. This lookback period in a particular case may be less than 3 years, depending on when vendor nexus was created.
  3. Minnesota: will abide by customary lookback periods of 3 years for sales/use tax and 4 years (3 look-back years and 1 current year) for income/franchise tax. Minnesota will grant shorter lookback periods to the time when the marketplace seller created nexus.
  4. Missouri: prospective-only for sales/use and income/franchise tax.
  5. North Carolina: prospective-only for sales/use and income/franchise tax. North Carolina will consider applications even if the entity had prior contact concerning tax liability or potential tax liability.
  6. Tennessee: prospective-only for sales/use tax, business tax and franchise and excise tax.

Practice Note

The MTC marketplace seller initiative is now up to 24 participating states. It is targeting online marketplace sellers that use a marketplace provider (such as the Amazon FBA program or similar platform or program providing fulfillment services) to facilitate retail sales into the state. In order to qualify, marketplace sellers must not have any nexus-creating contacts in the state, other than: (1) inventory stored in a third-party warehouse or fulfillment center located in the state or (2) other nexus-creating activities performed by the marketplace provider on behalf of the online marketplace seller.

While Missouri, North Carolina and Tennessee have signed on to the attractive baseline terms (no lookback for sales/use and income/franchise tax), Minnesota and Massachusetts are requiring their standard lookback periods (i.e., 3+ years). Thus, these two states (similar to Wisconsin) are not likely to attract many marketplace sellers. The District of Columbia’s noncommittal case-by-case offer leaves a lot to be determined, and their ultimate offer at the end of the process could range from no lookback to the standard three years.




MTC Offers 18 State Marketplace Seller Amnesty Initiative

The Multistate Tax Commission (MTC) is moving quickly to implement a multistate amnesty program through its current National Nexus Program (NNP) for sellers making sales through marketplaces. The new MTC marketplace seller amnesty program is limited to remote sellers (3P sellers) that have nexus with a state solely as the result of: (1) having inventory located in a fulfillment center or warehouse in that state operated by a marketplace provider; or (2) other nexus-creating activities of a marketplace provider in the state. Other qualifications include: (1) no prior contact/registration with the state; (2) timely application during the period of August 17, 2017 through October 17, 2017; and (3) registration with the state to begin collecting sales and use tax by no later than December 1, 2017, and income/franchise tax (to the extent applicable) starting with the 2017 tax year.

The baseline guarantee is prospective-only (beginning no later than Dec. 1, 2017) tax liability for sales and use and income/franchise tax, including waiver of penalties and interest. The program also attempts to ensure confidentiality of the 3P seller’s participation by prohibiting the states and MTC from honoring blanket requests from other jurisdictions for the identity of taxpayers filing returns. Note, however, that the confidentiality provision would still allow for disclosure of the content of the agreement in response to: (1) an inter-government exchange of information agreement in which the entity provides the taxpayer’s name and taxpayer identification number; (2) a statutory requirement; or (3) a lawful order.

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Finishing SALT: Inside SALT’s Monthly Recap

Wrapping up July—and Looking Forward to August

SALT Activities for August:

August 2, 2017: Diann Smith is moderating a panel at the 50th Multistate Tax Commission Annual Conference in Louisville, Kentucky about “The Significance of the MTC – Past, Present, and Future – from the Outside.”

August 5, 2017: Stephen Kranz is presenting about Unclaimed Property at the National Conference of State Legislatures (NCSL) SALT Task Force Meeting in Boston, Massachusetts, and will cover the following topics:

  • Lessons learned from the first legislative season in which the Revised Uniform Unclaimed Property Act was considered, and in some cases adopted in part.
  • The MoneyGram case, currently before the United States Supreme Court under its original jurisdiction to handle cases brought by one state against another, which may rewrite the rules regarding which state has priority over custody of unclaimed funds.

Wrapping up July:

Our July 2017 blog posts are available on insidesalt.com, or may be read below by clicking on the titles. To receive the latest on state and local tax news and commentary directly in your inbox as they are posted, click here to subscribe to our email list.

July 6, 2017: Connecticut Will Make You Disclose Personal Customer Data!

July 7, 2017: Tax Changes Implemented As Part of Revenue Package Supporting Illinois Budget

July 7, 2017: Illinois Unclaimed Property Law Substantially Revised As Part of Revenue Package Supporting Illinois Budget

July 12, 2017: Beverage Tax Wars Continue as Parties Head Back to Court for a Preliminary Injunction Hearing on the Cook County, Illinois Tax

July 13, 2017: What Is Minimal Substantial Nexus?

July 24, 2017: House Judiciary Subcommittee to Consider Sensenbrenner Bill Tomorrow




MTC Arm’s-Length Adjustment Service (Part II): “An Expression of Grief, Pity, or Concern”

Executive Summary

  • Multistate Tax Commission (MTC) transfer pricing program moving forward in some fashion;
  • Priority includes information sharing among participating states (and possibly their third party vendors) on transfer pricing issues. Because a formal agreement was found necessary, the scope of the information shared is presumed to include taxpayer specific information; and
  • States currently have significant inventory of transfer pricing audits that they admit they do not have the expertise to properly examine or defend in a protest.

The inaugural meeting (via conference call) of the Multistate Tax Commission’s Committee (Committee) addressing transfer pricing issues (ALAS) took place on April 7, 2016, and was certainly interesting.  A predecessor Working Group had created an extensive plan that is intended to be implemented by the Committee over 4 years.  The plan initially anticipated that approximately 10 states (at least) would agree to fund the cost of the multi-year program, but meeting that goal has not materialized.  Instead, the Committee is moving forward hoping to add more states (or limit services provided) as the plan progresses.  The anticipated program has multiple parts such as training, additional MTC staff resources and multistate transfer pricing audit and litigation support for participating states.

Ten states identified themselves on the call – only Pennsylvania was new to the process; the rest of the states on the call had all been involved in the predecessor Working Group.  Also on the call was Eric Cook, co-founder of Chainbridge, the company that is currently involved in the controversial transfer pricing approach adopted by the District of Columbia (and previously by some other states).  To no one’s surprise, all of the states agreed that Joe Garrett, Deputy Co-Commissioner of Revenue of Alabama, should be Chair of the Committee (he was the chair of the Working Group as well).  The group will have monthly calls which are open for the public to listen in on. (more…)




A Year’s Review of Massachusetts Tax Cases

Allied Domecq Spirits & Wines USA, Inc. v. Comm’r of Revenue, 85 Mass. App. Ct. 1125 (2014)

In a unique case, the Massachusetts Appeals Court affirmed a ruling of the Appellate Tax Board (ATB) that two corporations could not be combined for corporation excise tax purposes for 1996 through 2004. The distinctive aspect of this case was that a company was found not to have nexus with Massachusetts even though it rented property in the state and had employees in the state. If the company had been found to have nexus, it could have applied its losses to offset the income of an affiliated Massachusetts taxpayer in a combined report. The Appeals Court pointed to factual findings of the ATB that the transfer of employees located in Massachusetts to the company “had no practical economic effect other than the creation of a tax benefit and that tax avoidance was its motivating factor and only purpose.” The Massachusetts Supreme Judicial Court denied the taxpayer further review on August 1, 2014. Although this case is notable because the sham transaction doctrine rarely, if ever, has been applied to find that a company did not have nexus, a similar factual scenario likely would not occur today because Massachusetts adopted full unitary combination in 2009.

First Marblehead Corp. v. Comm’r of Revenue, 470 Mass. 497, 23 N.E.3d 892 (2015)

In a case that attracted the attention of, and an amicus brief from, the Multistate Tax Commission, the Supreme Judicial Court addressed how the property factor of a taxpayer subject to the Financial Institution Excise Tax (FIET) should be apportioned. The taxpayer, Gate Holdings, Inc. (Gate), had its commercial domicile in Massachusetts and held interests in a number of Delaware statutory trusts that purchased student loan portfolios. Below, the ATB held that Gate’s loans should be assigned to Massachusetts, resulting in a 100-percent property factor for apportionment purposes. The Supreme Judicial Court agreed and interpreted the Massachusetts sourcing provisions at issue, which are based on a model from the Multistate Tax Commission and incorporate the Solicitation, Investigation, Negotiation, Approval and Administration (SINAA) rules, as sourcing Gate’s loans to Massachusetts where Gates had its commercial domicile. The Supreme Judicial Court’s decision may be of interest in Massachusetts and other states because several states have adopted sourcing rules for financial institutions that are based on the Multistate Tax Commission’s model.

Genentech, Inc. v. Comm’r of Revenue, Mass. App. Tax Bd., Docket No. C282905, C293424, C298502, C298891 (2014)

The ATB held that Genentech, Inc., a biotechnology company, was engaged in substantial manufacturing and thus required to use single sales factor apportionment. Genentech is appealing the ruling.

National Grid Holdings, Inc. v. Comm’r of Revenue, Mass. App. Tax Bd., Docket No.  C292287; C292288; C292289 (2014); National Grid USA Service v. Comm’r of Revenue, Mass. App. Tax Bd., Docket No. C314926 (2014)

The ATB addressed whether an international utility corporation’s deferred subscription arrangements constituted debt for corporate excise purposes. The ATB held that it did not. In reaching its decision, [...]

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

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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Let the Training Begin: MTC Transfer Pricing Audits Draw Near

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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MTC Puts Designs on Increasing State Transfer Pricing Revenues

This past December, the Multistate Tax Commission’s (MTC) transfer pricing advisory committee and its project facilitator Dan Bucks recommended what it calls the “preliminary design” approach for a proposed Arm’s Length Adjustment Services (ALAS) program.  While still subject to approval, states already anticipate that the program will increase their state transfer pricing revenues.

The MTC ALAS is an attempt to bring to state governments a comprehensive and coordinated program to address income shifting and the loss of state tax revenues, much along the lines of what the United States and other foreign governments have been trying to do, most recently in their Base Erosion and Profit Shifting (BEPS) initiative.  The ALAS program is intended to address both interstate income shifting, which is never addressed at the federal level, and international income shifting, which the MTC believes is massively under-audited at the federal level.  According to some estimates, state revenue losses from transfer pricing total as high as $20 billion a year.

Fundamental to the preliminary design will be the hiring of a mix of MTC in-house and contract consulting expertise for advanced economic and technical analysis of taxpayer-provided transfer pricing studies, including providing alternative recommendations to taxpayer positions.  This approach (in contrast to a fully outsourced or in-house approach) recognizes the highly specialized and interdisciplinary nature of transfer pricing analysis, and the need to both quickly and effectively address and resolve immediate cases, as well as to build the capabilities and capacity (through training, information exchange, process improvements, etc.) to support state transfer pricing needs for the long-term.

Set to be voted on by the MTC’s Executive Committee at its May meeting, the ALAS program would kick-off in July 2015 with the hiring of an in-house tax manager, followed shortly thereafter with the engagement of one or more private economic consulting firms and an in-house senior economist by the end of the year.  The program would begin transfer pricing analyses by December 2015, with the completion of up to 18 joint economic studies by the end of 2017.

The focus of the initial stages of the ALAS approach will be on reviewing and analyzing the taxpayer’s existing transfer pricing study—questioning, critiquing and (re)-computing the taxpayer’s results– rather than attempting to re-create the transfer price whole cloth.  The effect is likely to produce a more rigorous, sophisticated and traditional analysis, one that paradoxically is likely to corroborate those taxpayer studies that are both thorough and orthodox in their approach, but at the same time pose a serious challenge to those that are not.

To the extent taxpayers don’t have formal documentation, they would be well-served to get it, or at least develop external third party benchmarks to corroborate their cross-border intercompany pricing.

The MTC’s proposed ALAS program is quite ambitious, not only in terms of its operational goals and timing, but also in its conception.  Preliminary or not, the programs’ combination of outside expert consultants with coordinated state resources, should cause taxpayers to reexamine the “designs” of their state transfer pricing [...]

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New Market-Based Sourcing in DC: Major Compliance Date Problem Fixed… For Now

The Problem

On September 23, 2014, the District of Columbia Council enacted market-based sourcing provisions for sales of intangibles and services as part of the 2015 Budget Support Act (BSA), as we previously discussed in more detail here.  Most notably the BSA adopts a single sales factor formula for the DC franchise tax, which is applicable for tax years beginning after December 31, 2014.  But the market-based sourcing provisions in the BSA did not align with the rest of the tax legislation.  Specifically, the BSA market-based sourcing provisions were made applicable as of October 1, 2014—creating instant tax implications on 2014 returns.  Absent a legislative fix, this seemingly minor discrepancy will trigger a giant compliance burden that will require a part-year calculation for both taxpayers and the Office of Tax and Revenue (OTR) before the 2014 franchise return deadline on March 15.  For example, taxpayers filing based on the new BSA provisions, as originally enacted in September, will have to use the cost-of-performance approach for the first nine months of the 2014 tax year and the new market-based sourcing approach for the remaining three.

The Fix

Citing to the unintended compliance burden, the Council recently enacted emergency legislation to temporarily fix the unintended compliance burden.  However they have not solved the problem going forward.  On December 17, 2014, Finance and Revenue Committee Chairman Jack Evans introduced identical pieces of legislation that included both a temporary and emergency amendment to quickly fix on the problem (both pieces of legislation share the name “The Market-Based Sourcing Inter Alia Clarification Act of 2014”).  These legislative amendments explicitly make the applicability of market-based sourcing provisions synonymous with the other provisions of the BSA, beginning for tax years after December 31, 2014.  In DC, “emergency” legislation may be enacted without the typical 30-day congressional review period required of all other legislation, but is limited to an effective period of no longer than 90 days.  Because the emergency market-based sourcing legislation was signed by Mayor Muriel Bowser on January 13, it will expire on April 13.  Important to DC franchise taxpayers, this date is before the September 15 deadline for extended filers.

The second piece of legislation was introduced on a “temporary” basis.  Unlike emergency legislation, temporary legislation simply bypasses assignment to a committee but must still undergo a second reading, mayoral review and the 30-day congressional review period.  The review period is 30 days that Congress is in session (not 30 calendar days).  Because the temporary Act is still awaiting Mayor Bowser’s approval at the moment, which is due by this Friday (February 6), it will not become effective until after the 2014 DC Franchise Tax regular filing deadline of March 15—even if it is approved by the Mayor and not subjected to a joint-resolution by Congress.  Neither the House nor Senate is in session the week of February 15, which pushes the 30-day review period to roughly April 1 (assuming it is immediately submitted to Congress).  However, once passed, [...]

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