Top State Tax Cases and Trends in 2020 - PowerPoint Presentation

1. Top State Tax Cases and Trends in 2020Tax Executives Institute, Inc. Houston Texas Jordan M. GoodmanHorwood Marcus & Berk Charteredjgoodman@hmblaw.comMarilyn Wethekam Horwood Marcus & Berk Charteredmwetheka@hmblaw.com

2. U.S. Supreme Court Jurisdictions to TaxCombined Reporting Tax Base IssuesApportionment IssuesProcedural TrapsAgenda

3. U.S. Supreme Court

4. Steiner v. UT State Tax Comm. (UT SC, August, 2019)The Utah Supreme Court refused to extend protections of the foreign commerce clause to individuals.The Steiners own an S Corp. that does business on a worldwide basis. Because Utah does not allow for a foreign tax credit, the Steiner’s deducted their foreign income. The Court disallowed the deductions holding that the deductions were not mandated by Dormant Commerce Clause or the Dormant Foreign Commerce Clause.Steiner V. Utah State Tax Commission

5. Arizona v. California (USSC Dict. 220150)On February 28, 2019, Arizona initiated an action in the USSC against California to challenge the $800 “doing business tax.”Arizona is alleging that California’s doing business tax “tramples over state borders and flouts constitutional precedents.”Arizona argues that the California law violated the Due Process Commerce Clause along with the Fourteenth Amendment.Arizona v. California

6. Jurisdiction to Tax

7. Purpose of PL 86-272Continued Viability in the Post- Wayfair 2020 worldMTC Project – Modernizing PL 86-272Cookie NexusOn-line presenceAre the throwback and/or throwout concepts viable in a Post-Wayfair world?PL 86-272

8. Apex Laboratories International v. City of Detroit (MI Court of Appeals,1/20)At issue is whether Detroit’s physical presence rule for imposition of its income tax still is applicable post WayfairOriginally Tax Tribunal and Court of Appeals held Apex was NOT subject to Detroit’s Income Tax due to lack of physical presence. Court of Appeals remanded case back to Tribunal to address the impact of Wayfair and the overruling of Quill and National Belles Hess.Normand V. Wal-Mart.com USA LLC (LA S. Ct. (January 29,2020))At issue is whether Walmart.com is responsible, pre Wayfair, for the Jefferson Parish Local Tax on sales of third party vendors though its own marketplace.Definition of a “Dealer” who is responsible for collection, reporting and remitting purposes is quite broad and includes anyone regularly or systematically soliciting in Louisiana.LA Supreme Court in a 4-3 decision reversed the Appellate Court and found Walmart.com was not a “dealer” for third party sellers.Decision was 4-3 with 2 of the dissents concerned about a procedural matter related to an expedited tax recovery procedureAdoption of a marketplace facilitator law will remedy tax collection on third party sales. Local Jurisdictional Issues

9. Combined Reporting

10. Will all states eventually adopt mandatory combined reporting?Water’s Edge v. WorldwideIllinois’ threat, to go back to worldwide combinationErosion of the 80/20 ConceptPending Legislation Virginia and MarylandCombined Reporting – Joyce/Finnigan IssuesMTC Uniformity Project“Alternative” Finnigan modelMitigation of Book Impacts for Publicly Traded CompaniesASC 740 DeductionProposed Legislation

11. How do you combine members of a unitary group that use different methods of apportionmentCan a transportation business, production business, financial business and a retailer be combined in a single unitary group?Unity of OwnershipApplication of CA Rev. and Tax Code §25105Commonly Controlled GroupApplication of CA Rev. and Tax code §25102Group Composition Issues

12. Tax Base Issues

13. John Deere v. Wisconsin Department of Revenue (WI Tax App. Comm. August 2019)The TAC held that Deere was entitled to a dividends received deduction even though the payment came from a foreign limited partnership that made a “check-the-box” election to be treated as corporation for federal and Wisconsin purposes.Wisconsin has taken the position that any payments not from a corporation based on common stock are not eligible for the dividends received deduction.ExxonMobil Corp. v. Montana Department of Revenue (Mt. S. Ct. 2019)The Court overruled the lower Court holding EMC was entitled to fully deduct dividends received from domestic subsidiaries that operated internationallyThe Court found that the State mirrors the 100% federal deductions for dividends received from 80/20 companies and that the 80% deduction cap applied only to an income exclusion of after-tax net income for 80/20 companies and not to dividends that a water’s–edge combined group actually receives from them. Taxation of Foreign Source Income

14. What is Transfer Pricing?Transfer pricing is the pricing of transactions between related entities for goods, intangible assets, services and loans.It’s designed to prevent tax avoidance among related entities by requiring pricing that places controlled transactions on par with transactions between unrelated parties.Transactions generally must be at arm’s length.Use “comparables” for arm’s length standard because identical transactions are usually not availableBest Method Rule: A method that provides the most reliable measure of an arm’s length result under the facts and circumstances of the particular transaction.A tax evasion or avoidance motive is generally not a prerequisite for application of an IRC section 482 adjustment.Addback v. Transfer Pricing Adjustments

15. Many states adopt or seek to apply IRC section 482-type powersStates with an IRC section 482 equivalent statute may or may not incorporate the federal regulations.Discretionary authority of state taxing administrators to adjust income may be granted through various mechanisms including:Adopting the IRC by reference, including IRC section 482 Adopting federal taxable income as the starting point in determining state taxable incomeEnacting statutes analogous to IRC section 482Discretionary authority statutesAdopting Uniform Division of Income for Tax Purposes Act (UDITPA), which provides rules regarding the allocation and apportionment of incomeMost States have Transfer Pricing Authority (or something like it)

16. States, through statute, administrative rules or litigation, may apply one of the following doctrines in policing related party transactions: Disallowance of deductions for payments made to related parties (the add-back rules) Redistribution of income or expense between related parties, Section 482 principles Forced combined or consolidated filing by related parties Assertion of jurisdiction over a non-filing entity based on the related party attributes in the state Application of economic substance, business purpose, or sham transaction doctrines Tax haven legislationRather than engaging in a substantive pricing analysis, states are increasingly either: Disregarding intercompany transactions; or Disallowing 100% of tax outcome by arguing that the transactions are per se distortive.State Use of Transfer Pricing Authority

17. Utah - use of the arm’s length transaction standard in determining whether the state may have improperly reallocated income between a taxpayer and a related partyIndiana – some courts are rejecting what is perceived as unreasonable and unsupported conclusions by the stateWashington – validity of transfer pricing methodology?State Transfer Pricing Developments

18. Ind. Dep’t of State Revenue, Ltr. of Findings No. 02-20150171 (Aug. 31, 2016)The Department equalized the operating margin between a retail entity that filed in Indiana (1-2%) and an out-of-state retail services entity (9-12%) to allocate additional income to the Indiana taxpayer.The Department acquiesced to the Tax Court’s position regarding the relevancy of transfer pricing studies discussed in the two previously mentioned matters. “[T]he Department agrees that the audit cannot set aside Taxpayer’s transfer pricing study on the grounds cited when it required Taxpayer to reapportion the gross operating margin between itself and Retail Services.”Indiana Letter Ruling

19. Apportionment Issues

20. Detroit Formula RevisitedTaxation of Foreign Source IncomeSingle Factor v. Three FactorAlternative Apportionment

21. Greenscapes Home & Garden Prod. Inc. v Testa (Ohio Crt of App. May, 2019)The Ohio Court of Appeals held that a Georgia wholesaler that made sales to a National Retailer but with a Bill of Lading in Ohio was subject to the CAT because its sales sourced to Ohio exceeded the economic threshold.This despite the fact that the National Retailer arranged to pick up the goods in Georgia and then distributed the goods around the country from its Ohio warehouse.Mia Shoes, Inc. v. McClain (BTA Case No. 2016-282 (August, 2019)The Ohio Board of Tax Appeals ruled that shoes shipped from outside the country to nationwide retailers’ distribution centers located in Ohio should be sitused to Ohio for the CAT.The BTA held that the taxpayer did not provide evidence that the shoes were further shipped to the retail stores outside of Ohio.Ohio has an “ultimate destination” test for sourcing purposes.Sourcing Issues

22. Microsoft V. Wisconsin Department of Revenue, (WI App. Ct. (11/19))The issue is whether the royalties Microsoft received through software licensing agreements with out-of-state hardware manufacturers whose products were used in Wisconsin were subject to tax in Wisconsin. Sales of intangibles are taxable in Wisconsin if the income-producing activity occurs in Wisconsin.The software licensing agreements allowed the computer hardware manufacturers to install Microsoft’s software on their computers, with sublicenses sold to “end-users” in retail stores such as Best Buy. In this case, the end-users were located in Wisconsin.The appeals court held that the licensor of the Microsoft software was the computer manufacturers who sold the hardware (with software included) to the sublicensees (end-users) in Wisconsin. There was no ‘direct relationship’ between Microsoft and the end-users.Royalties & Intangibles

23. Robert Half International, Inc. (CA Office of Tax Appeals – 2019)The issue is whether VAT collected on the provision of services in the EU is considered a gross receipt for California apportionment purposes.The OTA is pointed to the expansive definition of a gross receipt in California under the Microsoft and General Mills decisions are held the VAT collected is a gross receipt.The OTA rejected the Franchise Tax Board argument that the regulations distinguished between sales of services and tangible personal property. What is Gross Receipt?

24. Procedural Traps

25. Tax Analysts v. Illinois Department of RevenueRelease of Audit ManualCity of Chicago Disclosure of settlement agreementsDisclosure of Voluntary Disclosure AgreementsFreedom of Information – Shield or Sword?

26. Washington DC and California considering expansion to specifically include taxes.Relator fails to get attorney fees in a successful New York Qui Tam action against My Pillow. False Claims Acts - Expansion

27. Jordan M. Goodman’s BioJordan M. Goodman co-chairs Horwood Marcus & Berk's State and Local Tax Group and resolves state and local tax controversies including unclaimed property for multistate and multinational corporations, including Fortune 1000 clients with complex operations, in industries such as manufacturing, retailing, financial services, e-tailing, broadcasting and telecommunications. As both an attorney and a CPA, Jordan has a comprehensive view of tax planning issues and strategies. His experience and education enable him to deliver a creative, complete and practical approach to limiting the full range of tax exposures. He was recently elected as a fellow in the Litigation Counsel of America, an invitation only trial lawyers honorary society that includes less than one-half of one percent of American Lawyers.Jordan is one of the nation's most sought after lecturers and authors on multi-state tax issues, controversies and planning.  He has lectured on numerous state and local tax topics before business and professional associations.

28. Marilyn A. Wethekam’s BioMarilyn A. Wethekam is a partner at HMB Legal Counsel where she has a national SALT practice representing multistate and multinational corporations in all areas of state tax. Ms. Wethekam advises her clients on multistate tax issues that involve income, franchise and transaction taxes. Her corporate tax experience with Mobil Oil Corporation and Montgomery Ward & Co. provide her with an understanding of the complex issues encountered by multistate and multinational corporations. In 2010, she was named as the second recipient of the Council on State Taxation’s Paul Frankel Excellence in State Taxation Award. She received the 2012 Bloomberg BNA, Frank Latcham Award for Distinguished Service in State and Local Tax Law, was named one of the 2016 Outstanding Women in Tax by Tax Notes and named by Crain’s one of Chicago's Notable Women Lawyers 2018. Ms. Wethekam is a frequent speaker before such groups as the Council on State Taxation (COST), Georgetown University Institute on State and Local Taxation; The Paul J. Hartman State Tax Forum; Tax Executives Institute; and the Institute for Professionals in Taxation (IPT). She also serves on several SALT advisory boards.

29. Jordan M. GoodmanHorwood Marcus & Berk Charteredjgoodman@hmblaw.com312-606-3225Marilyn Wethekam Horwood Marcus & Berk Charteredmwetheka@hmblaw.com312-606-3240Questions?Thank you!