May 18 2017 2016 election outcomes 2 Post2016 elections balance of power provides opportunity for comprehensive tax reform in 2017 2016 electoral college results 270 required to win Trump ID: 658883
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Slide1
Tax Policy and Legislative Update
May 18, 2017Slide2
2016 election outcomes
2Slide3
Post-2016 elections balance of power provides opportunity for comprehensive tax reform in 2017
2016 electoral college results (270 required to win):
Trump
Clinton
306
232Slide4
US tax policy outlook for 2017 and beyond
4Slide5
Prospects for tax reform in 2017 and beyondComprehensive or incremental reform?
5
Largest Business Tax Expenditures
Corporate Share of Business IncomeSlide6
Legislative paths available for tax reform in 2017
Regular legislative
process
Benefits
Legislation
can be enacted
permanently
No artificial restrictions on which measures can be included
Limitations
60
votes needed at every
step in the
Senate (i.e.,
to begin debate, vote
on amendments, vote on passage, to conference,
etc
).
Budget
reconciliation process
BenefitsRequires only simple majority vote at every step in the Senate (no filibuster allowed)Expedited consideration (time limits for amendments and overall debate)Key LimitationsLegislation has to sunset if it is projected to lose revenue beyond the budget window (typically 10 years) 60-vote Senate super-majority required to waive sunset ruleSenate rules also require reconciliation to be used only to enact measures that have a fiscal effect on the federal budget
6Slide7
Comparison of Republican tax reform proposalsMajor business provisions excluding border tax adjustment
7
Proposal
Current law
2014 Camp bill (H.R. 1)
2016 House GOP blueprint
White House
Corporate tax
rate
35
%
25%
(
phased in over 5 years)
20
%
15
%
International tax regime
‘
Worldwide’
system
with deferral
Foreign
tax credits to mitigate double taxation
‘
Territorial’
system
95
% foreign dividend exemption
‘
Territorial’
system
100
% dividend exemption system
‘Territorial’ system (original
campaign proposal was for worldwide taxation
without
deferral)
“Deemed” repatriation
N/A
Previously untaxed foreign
earnings:
8.75
% cash
& cash-equivalents
3.5
% non-cash
assets
Paid
over
8
years; assume reduction in foreign tax credits
Same as H.R. 1
One-time tax on previously
untaxed foreign
earnings
(rate not specified; campaign proposal had 10% rate)
Cost recovery (full expensing)
Recover over the
investment’s applicable life (50% bonus depreciation for
equipment in 2017, phased-out by end of 2019)
Repeal
MACRS; implement
ADS type system
, with
inflation
Full expensing for investments (tangible
and intangible) excluding
land
No proposal (campaign
proposal allowed manufacturers to elect full expensing for investments)
Business interest expense
Deductible as incurred
Limit for thin capitalization
Deductible only against net interest
income; special
rules for financial services
No
proposal (campaign proposal required manufacturers electing full expensing to forego interest expense deduction)
Top
individual tax rate
39.6% plus 3.8% ACA
tax and 1.2% income-based phase-out of itemized deductions
25%
33%
35%
Pass-through businesses
Taxed at
individual rates
Same
as current law
Taxed at individual rates not to exceed 25%
15% (unclear if distributions from large pass-through entities subject to additional dividend tax)Slide8
Additional Congressional tax reform proposals
8Slide9
Senate Finance Committee Chairman Orrin Hatch (R-UT) focused on ‘corporate integration’Expected dividend paid deduction (DPD) specifications
9
DPD
—
C-corps
. may deduct
dividends paid
Withholding tax
— 35% rate on dividends
Shareholder
taxation of dividends
:
Individuals
.—T
axed
at
ordinary rates
with
nonrefundable
credit for w/h
tax
Corporations.—DRD is repealed? Carryover excess withholding tax credits?Foreign shareholders.—Override treaties?Tax exempts, pension funds.—W/h tax is not creditable against tax on UBTIRedemptions and sale of shares.–Same as present lawNet investment income tax.—Same as present lawInterest withholding.—To pay for DPD, a 35% nonrefundable withholding tax could be imposed on interest paid by C-corpsSlide10
Other factors driving US tax policy
10Slide11
President-elect Trump’s first 200 days agendaThe administration has identified an ambitious set of priorities
Tax reform
Health care reform (ACA repeal and replace)
Infrastructure
Trade (NAFTA, Trans-Pacific Partnership)
Financial regulation (D0dd-Frank)
Energy (Keystone pipeline)
Environmental de-regulation
ImmigrationSlide12
There will be several “action-forcing” deadlines in 2017. . .
12
Debt ceiling – statutory limit
resumed
March 15,
2017
Government funding –
current funding ends Sept. 30, 2017; “sequestration
”
spending
caps
currently scheduled to return
in FY 2018
FAA reauthorization – extended until September 30, 2017
… against a backdrop of many other legislative
requirements and
priorities
Administrative nominations
Supreme
Court nomination
Affordable Care Act repeal and replace
Budget resolutionSlide13
Concerns over growing federal deficitsSpending and revenues as a percentage of GDP
13
Source:
Congressional Budget Office,
The
2016 Long-Term Budget Outlook
(
July
2016).
2046
2016Slide14
Hot Topics in State Corporate Income Taxwww.pwc.comSlide15
Federal Reform – State considerations
15Slide16
Federal Reform Proposals
With Republican control of Congress and White House, comprehensive federal tax reform is likely.
Key recommendations of the House Republican plan lowering
the top U.S. corporate tax rate from
35% to 20%,
enacting a new
pas-through
business income tax system with a top rate of
25%,
eliminating corporate tax deductions,
providing full expensing for business costs (with no deduction for net business interest expense), and moving the United States from a worldwide international tax system to a territorial dividend exemption system. There could also be a limitation on the use of net operating losses to offset up to
90%
of net taxable income in any given year with an unlimited carryforward, a onetime mandatory repatriation of foreign earnings, and border adjustments that would exempt export sales from taxable income and preclude foreign costs of goods sold expense from being
deducted.
Trump’s
tax plan includes
reducing
the top U.S. corporate tax rate to 15%, permitting passthrough businesses to elect to be taxed at
15%,
taxing capital gain at a
maximum of 20% and previously untaxed foreign earnings subject to U.S. income tax at 10%, and allowing taxpayers engaged in manufacturing in the United States to elect full expensing of capital investment (while losing the deductibility of corporate interest expense). 16Slide17
Federal Reform Proposals – State considerations
Based on those proposed federal rate decreases, state effective tax rates, should they remain unchanged, would immediately become more material to taxpayers’ overall U.S. tax
footprint.
States
generally conform to the IRC in one of four ways: state taxable income begins with federal taxable income, fixed date conformity, rolling date conformity, or adoption of some IRC sections.
A
relevant consideration for states that conform to federal taxable income as the starting point for determining state taxable income or that have rolling date conformity may be whether to decouple from the new law, whereas states that have fixed date conformity or specific IRC adoption will have to consider whether and when to conform. Conformity generally revolves around federal taxable income, before NOLs and special deductions (line 28) are taken. Thus, if a state were to automatically conform to the blueprint’s provisions that impact line 28, it would be required to enact legislative changes to adopt any blueprint provisions that deal with other provisions, such as NOLs and the taxation of flow-through entities.
17Slide18
Combined Reporting
18Slide19
Combined Reporting - 2001
AK
HI
ME
RI
VT
NH
MA
NY
CT
PA
NJ
MD
DE
VA
WV
NC
SC
GA
FL
IL
OH
IN
MI
WI
KY
TN
AL
MS
AR
LA
TX
OK
MO
KS
IA
MN
ND
SD
NE
NM
AZ
CO
UT
WY
MT
WA
OR
ID
NV
CA
DC
Combined Reporting
Proposals
Unitary/Combined States
Remaining Separate Entity or Elective Consolidated Reporting/Other
19Slide20
Combined Reporting – 2016
AK
HI
ME
RI
VT
NH
MA
NY*
CT
PA
NJ
MD
DE
VA
WV
NC
SC
GA
FL
IL
OH
IN
MI
WI
KY
TN
AL
MS
AR
LA
TX
OK
MO
KS
IA
MN
ND
SD
NE
NM*
AZ
CO
UT
WY
MT
WA
OR
ID
NV
CA
DC
Combined Reporting Proposals Considered Recently and/or Currently Proposed
Unitary/Combined States
(now including the Ohio CAT, Texas
Margin)
Remaining Separate Entity or Elective Consolidated
Reporting/Other
*New Mexico requires certain unitary large retailers to file combined returns (2014).
20Slide21
Cases - CaliforniaComCon
Prod. Services I, Inc. v. California Franchise Tax Bd.; B259619 (12/14/2016)
The California
Court of
Appeal concluded that Comcast
and QVC were not vertically integrated, lacked a centralized management, generated no economies of scale, and produced no other flow of values that justified a unitary relationship.
The
Court also
affirmed the lower court’s decision that a termination fee related to a failed merger was business income for Comcast, because the transaction was similar to other cable acquisition transactions that Comcast had engaged in many times over the years as a regular part of its business.
21Slide22
Cases - Iowa22
Myria
Holdings Inc. & Subs., v. Department of Revenue
, Iowa Supreme Court, No 15-0296,
3/24/17
The Iowa Supreme Court concluded that an out-of-state parent corporation could not join in a consolidated tax return with its subsidiaries that did business in the state because it lacked taxable nexus with the state and its activities were limited to owning and controlling the subsidiaries.
Although
the Iowa Supreme Court ruled in favor of the Department of Revenue in this case, the opinion might prove instructive for parent companies challenging nexus assertions by the state.Slide23
Cases – TexasHearing 111,577 and 111,578, released April 2016
Two companies with common ownership were not required to file a combined return
The state
argued that
the companies should be combined because
they were both wholly owned by
the same
individual and they had shared centralized management (
they shared
a common administrator, common payroll, and
common software)
The
ALJ found that the shared administrative functions of
accounting and
overseeing (in a very general manner) purchasing activities
and other
common functions did not amount to centralized
management, much less strong
centralized managementAccordingly, the companies did not operate as a unitary business and were not required to file combined
returns
23Slide24
Tax havens
24
Some states provide for inclusion of entities incorporated or doing business in “tax haven” countries in the water’s-edge combined group
States that have adopted such provisions include Alaska, Connecticut, Montana, Oregon, Rhode Island, and West Virginia
The MTC model combined reporting statute permits water’s-edge reporting by election and includes the entire income and apportionment factors of any member doing business in a tax haven
Most
states have chosen to go with one of two approaches, either defining a “tax haven” on the basis of a list of foreign jurisdictions (commonly referred to as a “blacklist” approach) or by employing a facts and circumstances test modeled after the MTC’s “tax haven” definitionSlide25
Tax havens
2015 – 2016 enacted and proposed legislation There have been many state legislative proposals in recent months that impact international business organizations doing business in the US. Various forms of tax haven laws are already enacted in Alaska, DC, Montana, Rhode Island, Oregon, and West Virginia.
In
2015 Connecticut enacted and then modified a new tax haven law, Oregon broadened its tax haven laws, and DC modified the blacklist in its existing tax haven law.
The
2016 legislative session has been very active, with Alabama, Colorado, Kansas, Kentucky, Louisiana, Maine, and New Jersey introducing new tax haven bills
.
25Slide26
Tax haven legislative mapSlide27
Alaska approach
27
Alaska utilizes neither the “blacklist” nor the MTC approach, but instead has developed its own definition of a “tax haven” that is facts and circumstances driven
In
Alaska, a “tax haven” jurisdiction is a country that does not impose an income tax, or that imposes an income tax at a rate lower than 90% of the U.S.
rate
Further
, in order for the Alaska “tax haven” provision to apply, the foreign corporation must
either:
Have
50% or more of its sales, purchases, or payments of income or expenses, exclusive of payments for intangible property, made directly or indirectly to one or more members of the unitary return;
or
Not
conduct any significant economic activitySlide28
MTC approach
28
Many states, including RI, WV, and DC, have leveraged the “tax haven” definition provided in the MTC’s model combined reporting statute, which designates the following traits:
No or nominal effective tax on the relevant income
and
Has laws or practices that prevent effective exchange of information for tax purposes with other governments;
Lacks transparency;
Facilitates the establishment of foreign-owned entities without the need for a substantive local presence;
Excludes resident taxpayers from the tax regime’s benefits or prohibits businesses that benefit from operating in the local market;
or
Has created a tax regime which is favorable for tax avoidance, including whether the jurisdiction has a significant untaxed offshore financial or other services sector relative to its overall economySlide29
Blacklist approach
29
Montana and Oregon are the only states that currently have adopted a statutory “blacklist” approach that identifies specific countries as “tax havens”
On November 23, 2015, the District of Columbia repealed a statutory blacklist that had been previously adopted
Connecticut Commissioner was to publish “blacklist” by regulation by 9/30/2016. This provision was repealed by SB1601, which also excludes
jurisdictions that have entered into a comprehensive income tax treaty with the United
States.
“Tax haven” is based on whether the foreign corporation is
incorporated in
or
doing business in
a listed jurisdiction
Lists typically include around 40-plus foreign countries
Luxembourg is notably on the “tax haven” list for MT & ORSlide30
Blacklists compared
30
Montana Blacklist - 40
Andorra, Anguilla, Antigua and Barbuda,
Aruba
, Bahamas,
Bahrain
, Barbados, Belize, Bermuda, British Virgin Islands, Cayman Islands, Cook Islands,
Cyprus
,
Dominica
,
Gibraltar
, Grenada, Guernsey,
Isle of Man
,
Jersey
, Liberia, Liechtenstein,
Luxembourg
,
Malta
,
Marshall Islands
, Mauritius, Monaco, Montserrat, Nauru,
Netherlands Antilles
, Niue,
Samoa
,
San Marino
, Seychelles, St. Kitts and Nevis,
St. Lucia
, St. Vincent and the Grenadines,
Tonga
, Turks and Caicos, US Virgin Islands, Vanuatu
Andorra, Anguilla, Antigua and Barbuda, Bahamas, Barbados, Belize, Bermuda, British Virgin Islands,
Brunei
, Cayman Islands, Cook Islands, Grenada, Guernsey,
Hong Kong
, Liberia, Liechtenstein,
Maldives
, Marshall Islands, Mauritius, Monaco, Montserrat, Nauru, Niue,
Panama
, Seychelles, St. Kitts and Nevis, St. Vincent and the Grenadines, Turks and Caicos, US Virgin Islands, Vanuatu
EU Blacklist - 30Slide31
Rhode Island approach
31
Excludes treaty-protected income of non-US corporations, but disqualifies “tax haven” countries from this treaty exclusion
However, provides safe harbors:
Transactions at arm’s length and not with the principal purpose to avoid the payment of taxes; or
The taxpayer establishes that inclusion of such net income in the combined group is unreasonableSlide32
Fixing the list: Oregon proposal
32
Tax haven inclusion limited to effectively connected income
If ECI, safe harbors still apply:
Less than 20% U.S. property, payroll & sales factors;
Income subject to a federal income tax treaty;
or
Transactions at arm’s length without the principal purpose to avoid the payment of taxesSlide33
2015: Oregon legislative expansion
33
OR expands statutory tax haven list (S.B. 61); effective for tax years beginning on or after 1/1/16
Adds Guatemala & Trinidad and Tobago to the list
Specifically provides that either the taxpayer or the DOR may invoke Oregon’s version of UDITPA Sec. 18 (alternative apportionment)
However, the bill also appears to remove the provision requiring factor representation for tax haven included income from ORS Sec. 317.715(4)(b)
Legislation requires the Legislative Revenue Officer, after consulting with the DOR, to provide a report regarding the “cost-effectiveness” of Oregon’s tax haven lawSlide34
Nexus34Slide35
Cases – Ohio
Crutchfield Corp. v. Testa; No. 2015-0386; Slip Opinion No. 2016-Ohio-7760
(11/17/2016)
The Ohio Supreme Court held that the state's commercial activity tax (CAT) economic threshold created substantial nexus for an online retailer.
On
appeal from a 2015 Board of Tax Appeals (BTA) decision, the Court ruled that physical presence is not a necessary condition for imposing the CAT because the statutory $500,000 sales-receipts threshold is an adequate quantitative standard that satisfies the dormant Commerce Clause’s substantial nexus requirement.
In
addition, the Court ruled that the burdens imposed by the CAT on interstate commerce are not clearly excessive in relation to fair taxation for both in-state and out-of-state sellers.
35Slide36
Tax Base36Slide37
Nationwide Trends – Related Party Addbacks
AK
HI
ME
RI
VT
NH
MA
NY
CT
PA
NJ
MD
DE
VA
NC
SC*
GA
FL
IL
OH
IN
MI
WI
KY
TN
AL
MS
AR
LA
TX
OK
MO
KS
IA
MN**
ND
SD
NE
NM
AZ
CO
UT
WY
MT
WA
OR
ID
NV
CA
DC
Related member expense addback required (including DC, NYC)
Related
member expense addback legislative proposals considered in recent years
No related party addback provisions
imposed
Repealed in OR eff. 1/1/13 and in RI eff. 1/1/15
*South Carolina disallows deductions for an expense between related parties where a payment is accrued, but not actually paid and on interest deductions on obligations issued as a dividend or paid instead of a dividend
**Minnesota requires a
ddback of interest and intangible expenses, losses, and costs paid, accrued, or incurred by any member of the taxpayer's unitary group to a foreign operating corporation that is a member of the taxpayer's unitary business group,
WV
37Slide38
–
Cases - Alabama
The Sherwin-Williams Co. v. Dep't of Revenue;
Docket No. BIT. 13-359; Docket No. BIT. 11-741 (11/30/16
)
The Alabama
Tax Tribunal held that the domestic production activities deduction
limitation (DPAD),
which is calculated on a consolidated basis for federal income tax purposes, should be calculated for Alabama purposes based on the amount of federal taxable income as determined by the proforma separate federal tax return required by Alabama law, before any state modifications.
Therefore
, the DPAD limitation should be based on proforma separate federal taxable income, and not Alabama taxable income
.
38Slide39
California
39
FTB
Technical Advice Memorandum No.
2017-03 (4/6/17
)
The FTB
has released a technical advice memorandum regarding the application of
IRC Code
Sec. 382
– 384
for
California tax
purposes for apportioning
taxpayers:
the
limitation provided for in Code Sec. 382(b)(1) is applied on a
pre-apportionment
basis;the recognized built-in gains / losses (RBIGs / RBILs) provided
for in Code Sec. 382(h)(2) are determined on a
post-apportionment
basis;the net unrealized built-in gains / losses (NUBIGs / NUBILs) provided for in Code Sec. 382(h)(3) are determined on a post-apportionment basis;the limitation on the use of excess credits provided for in Code Sec. 383(a)(1), is applied on a pre-apportionment basis;when using the examples in Treas. Reg. § 1.383-1(f), the CA corporate franchise tax rate provided in Cal. Rev. & Tax. Cd. § 23151 and 23186 should be substituted for the applicable federal corporate income tax rate referenced in those examples; and the RBIGs provided for in Code Sec. 384(a)(2) are determined on a post-apportionment basis when considered for purposes relating to pre-acquisition losses.Slide40
Cases – Pennsylvania
RB Alden Corp. v. Commonwealth of Pennsylvania, Pa. Comm. Ct., No. 73 F.R.
2011 (06/15/2016)
The
Commonwealth Court of Pennsylvania held that the net loss carryover (
NLC) deduction
allowed for purposes of the Pennsylvania corporate net income (CNI) tax, violates
the Uniformity
Clause of the Pennsylvania Constitution.
Consistent
with its November 2015 decision
in
Nextel
Communications of Mid-Atlantic, Inc. v. Commonwealth of Pennsylvania
, 129 A.3d 1 (
Pa. Cmwlth
. 2015).
The court concluded the NLC deduction creates classes of taxpayers according to
their taxable income and that such classification is unconstitutional. It is significant that the court in Alden permitted the taxpayer to reduce its taxable income to zero, an outcome that matches the remedy applied in Nextel. The
court also analyzed whether the gain on the sale of a partnership interest is
nonbusiness income
and, to the extent business income, whether the gain should be sourced to Pennsylvania, among other issues.40Slide41
Cases – Pennsylvania
Nextel Communications of the Mid-Atlantic, Inc., v. Commonwealth of Pennsylvania, Pa. Commonwealth Court, No, 98 F.R. 2012, November 23, 2015
The Commonwealth Court of Pennsylvania held that the net loss carryover (NLC) deduction allowed for purposes of the Pennsylvania corporate net income (CNI) tax, as applied to Nextel Communications, violates the Uniformity Clause of the Pennsylvania Constitution.
The
court concluded the NLC deduction creates classes of taxpayers according to their taxable income.
Taxpayers
with taxable income in excess of $3 million could not reduce their CNI liability to zero whereas similarly-situated taxpayers with $3 million or less in taxable income could reduce their CNI liability to zero.
The
court found such classification unreasonable and not related to any legitimate state purpose.
41Slide42
Allocation and Apportionment
42Slide43
Nationwide Trends – Allocation and ApportionmentApportionment Trends
Shift in factor weighting Sales factorGross versus net Market source versus cost of performance
Use of discretionary authority to adjust formula (UDIPTA Sec. 18)
43Slide44
Apportionment Formulas* - 1998
Equally weighted three factor formula
Double weighted sales factor
Triple or greater weighted or single sales factor
*Does not address industry-specific or optional formulas
AK
HI
ME
VT
NH
MA
NY
CT
PA
MD
DE
VA
WV
NC
SC
GA
FL
IL
OH
IN
MI
WI
KY
TN
AL
MS
AR
LA
TX
OK
MO
KS
IA
MN
ND
SD
NE
NM
AZ
CO
UT
WY
MT
WA
OR
ID
NV
CA
DC
NJ
RI
44Slide45
Apportionment Formulas* - 2003
Equally weighted three factor formula
Double weighted sales factor
Triple or greater weighted or single sales factor
*Does not address industry-specific or optional formulas
AK
HI
ME
VT
NH
MA
NY
CT
PA
MD
DE
VA
WV
NC
SC
GA
FL
IL
OH
IN
MI
WI
KY
TN
AL
MS
AR
LA
TX
OK
MO
KS
IA
MN
ND
SD
NE
NM
AZ
CO
UT
WY
MT
WA
OR
ID
NV
CA
DC
NJ
RI
45Slide46
Apportionment Formulas* - 2017
Equally weighted three factor formula
Double weighted sales factor
Triple or greater weighted or single sales factor
*Does not address industry-specific or optional
formulas
**Taxpayers can elect single sales factor
Reflects changes enacted in 2016 that might take effect later
AK
HI
ME
VT
NH
MA
NY
CT
PA
MD
DE
VA
WV
NC
SC
GA
FL
IL
OH
IN
MI
WI
KY
TN
AL
MS
AR
LA
TX
OK
MO
KS
IA
MN
ND
SD
NE
NM
AZ**
CO
UT
WY
MT
WA
OR
ID
NV
CA
DC
NJ
RI
46Slide47
Gillette and the MTC ElectionSlide
47
State
Case
Summary of Status
Michigan
IBM
-July 14, 2014-
Michigan Supreme Court held IBM was entitled to use MTC three-factor apportionment formula.
-April 28, 2015- Michigan Court of Claims ruled IBM could not make the MTC election due to the 2014 retroactive compact appeal effective January 1, 2008.
Gillette Commercial Operations
AK Steel
-September 29, 2015- Michigan Appellate Court upheld
the state’s retroactive repeal of the MTC compact, finding the legislature had a legitimate purpose for retroactive appeal. Further, the court found the Compact was not a binding contract under state law so it did not violate state or federal contract clauses.
-February 25, 2016 – Michigan Appellate court held that MTC three factor apportionment election was not impliedly repealed for SBT purposes.
Minnesota
Kimberly-Clark
- June 19, 2015-
Minnesota Tax Court ruled that state’s repeal of the Compact does not violate the US or MN contract clause constitutional provisions.
- June 22, 2016 – Minnesota Supreme Court ruled that the legislature’s repeal in 1987 of the equally weighted three factor apportionment election found in Articles III and IV on the Multistate Tax Compact was permissible.
Oregon
Health Ne-September 9, 2015- Oregon Tax Court ruled the taxpayer could not use the MTC three-factor apportionment formula and the Compact did not constitute a binding state contract.-Health Net has appealed this matter to the Oregon Supreme Court.TexasGraphic Packaging
-July 28, 2015-
Texas Court of Appeals determined Texas Franchise Tax is not a tax imposed on net income for MTC purposes and therefore, the MTC three-factor apportionment provisions were not available to the taxpayer.
-December 14, 2015, Graphic Packaging petitioned the Supreme Court of Texas for review.Slide48
Gillette and the MTC Election
California California was a signatory state to the Multistate Tax Compact, which includes a provision that obligates member states to offer taxpayers the option of using an equally weighted three factor apportionment formula or the state’s alternative formula.
California adopted a double weighted sales factor in 1993. Gillette elected to use the equally weighted three factor apportionment formula.
California
Court of Appeal held California is bound by the Compact and the election provision unless it withdraws from the Compact.
On December 31, 2015, the California Supreme Court held that California law precludes taxpayers from relying on the Multistate Tax Compact’s equally-weighted three-factor apportionment election provision. The Court reasoned the Compact was not a binding reciprocal agreement and the California Legislature was not required to allow the Compact’s election provision.
See, The
Gillette Co. v. Franchise Tax Board
, Cal. Sup. Ct., No, S206587 (12/31/15)
Slide
48Slide49
Gillette and the MTC Election
California (cont’d)On November 1, 2016, the California Franchise Tax Board (FTB) issued Notice 2016-03 to provide the intended courses of action on Multistate Tax Compact election cases.
The
FTB will be shifting claims for refund and administrative protests back into ‘active’ status and will start to address them in the normal course of business. Taxpayers can expect to receive formal notices about their claims and protests in the upcoming months.
The FTB advises taxpayers that they should make tax deposits or pay proposed deficiency assessments to stop the accrual of interest. Finally, the FTB indicated that penalties will be imposed as appropriate on a case-by-case basis.
49Slide50
Gillette and the MTC Election
Michigan On February 25, 2016, the Michigan Court of Appeals held that the Multistate Tax Compact’s
equally weighted three-factor
apportionment election was not impliedly repealed for purposes of
apportioning income
under Michigan’s Single Business Tax (SBT).
The
court recognized the conflict between
the SBT’s
apportionment language and the Compact’s election. However, the court harmonized the
two provisions
and found that taxpayers had a choice: they could elect to apportion under the Compact
or, failing
to elect, they would be required to apportion under the SBT apportionment provisions.
The Court of Claims’ orders granted summary disposition in favor of the Department finding that
the SBT
apportionment provision impliedly repealed the Compact election. The Court of Appeals, on
de novo
review, reversed these orders and remanded the cases back to the Court of Claims.See AK Steel v. Department of Treasury
, Mi. App. Ct., No. 237175 (2/25/16
)
Slide 50Slide51
Gillette and the MTC Election
UtahS.B. 247 repeals Compact provisions from Utah law and temporarily reinstates most provisions of the Compact, but not Article III (allowing taxpayer to elect to apportion under the laws of the state or in accordance with the Compact provisions) or Article IV (apportionment provisions).
District of Columbia
FY 14 budget, enacted 7/30/13, repeals
and re-enacts provisions of the Multistate Tax Compact (Section HH); and (3) makes other tax changes. The re-enacted Compact provisions do not include Article III (allowing taxpayers to elect to apportion under the laws of the District or in accordance with Compact provisions) or Article IV (containing the apportionment provisions).
51Slide52
Gillette and the MTC Election
MinnesotaH.F 677, signed on May 23, 2013Repeals Minn. Stat. sec. 290.171, which enacts the Multistate Tax Compact.
Authorizes the commissioner to participate in audits performed by the Multistate Tax Commission.
Because the bill provides no specific effective date, the Compact repeal takes effect on August 1, 2013.
Remains unclear to which taxable year the repeal applies.
52Slide53
Gillette and the MTC Election
Minnesota Kimberly-Clark Corp. v. Commissioner of Revenue, A15-1322 (June 22, 2016)
Minnesota
Supreme Court ruled that the legislature’s repeal in 1987 of the equally weighted three factor apportionment election found in Articles III and IV on the Multistate Tax Compact was permissible
.
At issue before the Court was the fundamental question of whether the Minnesota legislature’s enactment of the Compact in 1983 formed a binding contract that, until the state withdrew from the Compact, prevailed over any conflicting state law.
The Court
stated that “articles III and IV clearly provide for the apportionment election, but do not contain a separate and distinct promise that the State would not alter or repeal the election.”
53Slide54
Gillette and the MTC Election
S.B. 2292, signed on April 20, 2015Effective for taxable years beginning after December 31, 2014, taxpayers are allowed to make an election to apportion business income with a sales factor that phases into a single-sales factor over a five year period.
Additionally
,
certain
provisions of the Multistate Tax Compact. For example, Article III of the Compact, which allows taxpayers an election to apportion under the laws of the state or in accordance with Compact provisions, was repealed.
54Slide55
Gillette and the MTC Election
OregonS.B. 307 signed on June 13, 2013, repeals all provisions of ORS 305.665, which includes the Multistate Tax Compact, and then re-enact most provisions of the Compact excluding Article III (allowing taxpayers to elect to apportion under the laws of the state or in accordance with Compact provisions) and Article IV (containing the apportionment provisions).
The bill is effective for tax years beginning on or after January 1, 2013.
55Slide56
Market-Based Sourcing
DC
AK
HI
ME
RI
VT
NH
MA
NY
CT
PA#
NJ
MD
DE
VA
WV
NC
SC
GA
FL
IL
OH
IN
MI
WI
KY
TN
AL
MS
AR
LA
TX
OK
MO@
KS
IA
MN
ND
SD
NE
NM
AZ**
CO##
UT
WY
MT
WA
OR
ID
NV
CA*
*Effective in 2011, for taxpayers that elect single sales factor only, but see Prop. 39
**Elective for deemed multistate service providers
@For taxpayers that elect single sales factor
#service receipts only effective in 2014
## intangible property receipts only
56Slide57
Legislation – DelawareH.B.
235 , signed on January 27, 2016H.B. 235, “The Delaware Competes Act of 2016,”
provides a
four year phase-in to single sales factor apportionment, beginning in 2017.
The Act grants an option for telecommunications corporations, and companies with their
world headquarters
and significant capital investment in Delaware to make an annual election to use
either single
sales factor or three-factor apportionment starting in 2017.
Effective for tax periods beginning after December 31, 2015, non-US corporations include only
US property
and payroll when calculating the denominator for each factor. The Act does not have a
similar requirement
for the sales factor.
This phase-in does not apply to asset management corporations, which remain subject to a single
sales factor
apportionment.
57Slide58
Legislation - Indiana
S.B. 440, signed on April 13, 2017
Effective
July 1
,
2017:
The taxpayer
petitioning for, or
the department
requiring,
alternative apportionment bears
the burden of
proof that
the apportionment provisions as enacted do not
fairly represent the taxpayer's income derived from
sources within
this state
AND
the alternative apportionment method is reasonable.
58Slide59
Cases - Maryland
Petition of Staples Inc. and Staples the Office Superstore, LLC, and the Decision of the Maryland Tax Court; Anne Arundel County Circuit Court, No. C-02-CV-15-002009, December 30, 2016
The Circuit Court
also upheld the tax court’s decision allowing the Comptroller of Maryland to apply an alternative apportionment formula.
The
court found that out-of-state entities failed to carry their burden of proving that the Comptroller’s non-statutory formula “produced a tax liability out of all appropriate proportion to the business transacted in Maryland or led to a ‘grossly distorted result
.
The method applied by the Comptroller is described as “
captur
[
ing
] the royalty and interest expenses of [Maryland Affiliates] that simultaneously constituted the income of [Petitioners].”
The Circuit Court reasoned that Petitioners “offered little proof demonstrating that the Comptroller’s formula – which it had ‘wide latitude’ to apply - produced a disproportionate, distorted, arbitrary, or unreasonable” tax liability
59Slide60
Cases - Massachusetts
Genentech, Inc, v. Commissioner of Revenue, No. SJC-12083, (01/12/2017)
The
Supreme Judicial Court of Massachusetts affirmed an Appellate Tax Board decision that a drug producer was a qualified manufacturer and was required to use the state’s single-sales factor apportionment formula.
In
determining that the drug producer’s manufacturing receipts were substantial, as is required under state law for a taxpayer to qualify as a manufacturer, the Court declined to include receipts from the redemption of short-term investments by the company’s treasury department.
Additionally, the Court found that application of the single-factor formula did not create an unconstitutional discrimination against interstate commerce
.
This decision potentially opens the door to a new area of economic activity that might be considered ‘manufacturing’ for Massachusetts.
60Slide61
Other Nationwide Developments
61Slide62
US Supreme Court
Comptroller of the Treasury of Maryland v. Wynne, U.S. Supreme Ct., No. 13-485 107, May 18, 2015
In a 5-4 decision, the United States Supreme Court found that the absence of a credit against the local portion of the state's personal income tax, with respect to tax paid to another state on pass-through income from an S corporation, was unconstitutional.
The
tax failed the dormant Commerce Clause’s internal consistency test because if every state adopted Maryland’s tax scheme, interstate commerce would be taxed at a higher rate than intrastate commerce.
The
Court noted that a Maryland resident earning income outside the state would experience double taxation due to paying tax in his state of residence and in the state where income is earned.
The
Court further held that the tax is inherently discriminatory and operates as a tariff.
The
Court rejected assertions that it reach a different result because applicable Supreme Court dormant Commerce Clause authority involves corporate gross receipts taxes. The Court provided that its conclusion was not affected by the fact that the instant case involved a state’s personal income tax.
62Slide63
US Supreme Court
First Marblehead Corp. v. Comm’r of Revenue , Mass., No. SJC-11609, 8/12/16
On
October 13, 2015, the U.S. Supreme Court accepted review of a Massachusetts internal consistency case, vacating a state high court ruling and remanding the case for further consideration in light of the Court's decision in
Comptroller of Treasury
of Maryland
v. Wynne.
On
August 12, 2016, the Massachusetts Supreme Judicial Court held on remand that the state's apportionment of loan income to the state did not violate the internal consistency test of the dormant commerce clause because if every state enacted an identical statute, it would not lead to more than 100 percent of a unitary business's income being taxed.
On
December 15, 2016, First Marblehead Corp. asked the U.S. Supreme Court to review the decision, arguing that the Massachusetts property factor for financial institutions -- as construed by the Massachusetts Supreme Judicial Court -- gives rise to double taxation for financial institutions that outsource the servicing of their loans, and captures tax revenue rightly belonging to other jurisdictions.
On February 12, 2017, the U.S. Supreme Court denied cert.
63Slide64
Amnesty programs
64
State
Amnesty period
Program
summary /
benefti
Pennsylvania
4/21/17 – 7/19/17
100% penalty and 50% of interest waiver
Applies to any tax administered by the DOR on which a taxpayer is delinquent as of 12/31/15
A taxpayer with unknown liabilities reported and paid under the program and that complies with all other requirements will not be liable for any taxes of the same type due prior to 1/1/11
Virginia
A 60 to 75 day period between 7/1/17 – 6/30/18. Exact dates TBD.
100%
penalty and 50% of interest waiver
Applies to any tax administered by the Tax Department, except income tax liabilities (for corporations, individuals, and estates and trust) attributable to tax years beginning on or after January 1, 2016.Slide65
California
A.B. 154, signed September 30, 3015Effective for tax years beginning on or after January 1, 2015, unless otherwise noted,
the following
changes to the large corporate understatement
penalty were made:
an increase in tax from a proper election under IRC sec. 338 as reported on the first amended
return
an understatement attributable to either of the following:
the
Franchise Tax Board's (FTB) imposition of an alternative apportionment or allocation method under the authority of Revenue and Taxation Code (R&TC) Section 25137 (operative for any taxable year with an open statute of limitations as of the effective date of A.B. 154)
a
change to the taxpayer's federal method of accounting where the due date of the return is before the Secretary of the Treasury's determination to change the accounting method.
California
tax law
conforms to
relevant sections of the Internal Revenue Code for taxable years beginning on or after January 1, 2015
65Slide66
Louisiana 2017
Budget Stabilization Plan, Office of the Governor (3/29/2017)
In response to the state’s $1.3 billion fiscal cliff, Louisiana Governor John Edwards proposed several tax changes, including:
a
gross receipts tax on businesses,
expansion
of the sales tax base to certain services,
the
phase-out of the corporate franchise tax,
a
reduction in rate for the corporate and personal income tax and the sales tax,
the
elimination of the deduction for federal income tax paid,
and
making
permanent the reduction of certain tax credits and incentives
66Slide67
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