The material appearing in this presentation is for informational purposes only and is not legal or accounting advice. Communication of this

Transcription

1 State Tax Update

2 The material appearing in this presentation is for informational purposes only and is not legal or accounting advice. Communication of this information is not intended to create, and receipt does not constitute, a legal relationship, including, but not limited to, an accountant-client relationship. Although these materials may have been prepared by professionals, they should not be used as a substitute for professional services. If legal, accounting, or other professional advice is required, the services of a professional should be sought.

3 STATE TRENDS Budget short falls have caused most states to revise their tax structures to create a more consistent tax base and target out of state companies Remote seller / affiliate nexus Economic nexus Use of third-party servers (cloud computing) Combined reporting States advertised amnesty programs

4 STATE TRENDS Corporate Income Tax Minimum taxes and surtaxes Single sales factor Market based sourcing Economic nexus standards Mandatory unitary reporting Application to all forms of organization

5 STATE TRENDS Sales Tax Expansion of the tax base o More services (e.g., Washington, New Mexico) o Digital products o Use tax registration (e.g., California) Other Trends Gross receipts tax regimes (e.g., Michigan, Ohio, Texas) Aggressive auditing Information sharing among state departments Phishing letters and nexus questionnaires

6 COMMON TAX REFORM OBJECTIVES Improve business tax system competitiveness Shift taxes to out-of-state taxpayers move from origin to destination-based taxes Reduce volatility in state tax system Expand taxpayer population to broaden base, lower rates and reduce distortions Find an effective way to tax services and crossborder sales Bring new taxpayers into the state

7 REMOTE SELLER NEXUS SALES TAX AKA: Amazon Laws, affiliate nexus, click-through nexus New York decision remanded back to trial court Adopted in CA, CT, IL, MO, NC, NY, OH, RI, VT Considered in other states California temporarily repealed click through nexus effective 9/23/11 until 9/15/12 or until federal legislation intervenes Remote seller information reporting CO, NC, VT

8 FEDERAL LEGISLATION AFFECTING ONLINE COMMERCE H.R Main Street Fairness Act H.R Digital Goods and Services Tax Fairness Act

9 ECONOMIC NEXUS INCOME TAX States are increasingly moving towards apportioning service revenue based on where the benefit of the service is received (market-based sourcing) as opposed to where the cost of performance occurs Places greater tax burden on out of state companies Sales of services are not protected under P.L States with market based sourcing rules: AL, CA (elective), GA, IA, IL, MD, ME, MI, MN, OH, OK, UT, WI Expect more states to adopt

10 WASHINGTON TAX UPDATE Economic nexus rules now applicable for service and other taxpayers o No physical presence required o Nexus exists for apportionable activities in Washington where: Business entity is organized or domiciled in Washington; or Business entity is organized or domiciled outside of Washington and has:» More than $50K of property in Washington;» More than $50K of payroll in Washington;» More than $250K of receipts from Washington; or» At least 25% of the entity s property, payroll or total receipts is in Washington. Service apportionment based on sales only o Rule 194 cost apportionment is gone; there has been lots of change here Temporary rate increase to 1.8% until June 30, 2013

11 OREGON Oregon Minimum Tax Corporate and individual tax rate increases Oregon s definition of nexus is changing Connection to the Internal Revenue Code

12 OREGON MINIMUM TAX Oregon has increased its corporate minimum excise tax ranging from $150 to $100,000 based on gross receipts in the state. The minimum tax is based on the numerator of the entity s or group s sales factor. Oregon will still look to its standard nexus rules for purposes of including sales in the minimum tax calculation. Unitary flow through receipts are included at pro rata percent of gross. S Corps and Partnerships are subject to the $150 minimum tax Nonprofits with UBI are subject to the minimum tax on their UBI.

13 OREGON CORPORATE INCOME TAX RATES The Oregon corporate income tax rate was historically a flat 6.6%. The rate is now graduated with the following brackets: For 2009 and 2010 the rate increased to 7.9% for income over $250,000 For 2011 and 2012 the rate is 7.6% for income over $250,000 After 2012 the rate will be 7.6% for income over $10,000,000

14 OREGON INDIVIDUAL INCOME TAX RATES Oregon individual tax rates are at 10.8% for income $250,000 - $500,000 (MFJ) and 11% for income over $500,000 for January 1, 2009 December 31, 2011 The top rate will decrease to 9.9% beginning January 1, 2012

15 OREGON S ECONOMIC NEXUS Oregon considers companies doing business in the state when they engage in any profit-seeking activity within the state. Taxes are imposed when a company has substantial nexus with Oregon, which may be established through the significant economic presence of a company in Oregon. Factors that evidence significant economic presence include: o Maintains continuous or systematic contacts with Oregon s economy o Receives significant gross receipts attributed to customers in Oregon o Conducts deliberate marketing to or solicitation of Oregon customers o Receives benefits provided by the state This relates to sales of services. P.L protects sales of tangible personal property. It is still questionable as to whether companies are protected from the Oregon minimum tax.

16 OREGON S CONNECTION TO FEDERAL As of January 1, 2011 Oregon has converted back to a rolling reconnect to the Internal Revenue Code. Including: Bonus depreciation Section 179 expensing Section 108 Discharge of indebtedness Still disconnected from Section 199 Domestic Production Manufacturing Deduction

17 CALIFORNIA TAX CHANGES Economic nexus standard in 2011 Single sales factor election in 2011 Elective market based sourcing of services and intangibles in 2011

18 2011 CALIFORNIA ECONOMIC NEXUS Doing Business includes a corporation with any of following: Organized or commercially domiciled in California Sales over $500K or 25% of total receipts Property over $50K or 25% of total property Payroll over $50K or 25% of total payroll P.L does not trump economic nexus Expect increased California audit activity Sharing of data between SBE, EDD and FTB

19 TOP 11 ISSUES & OPPORTUNITIES IN STATE TAX FOR PNW BASED COMPANIES Guess what you probably have nexus! Complete a nexus study...many new traps and trends. Economic nexus, affiliate nexus, click through nexus; it s not just the activities of your employees and property your contractors and vendors create nexus for you too. Credit and incentive scrub for all employment, zone and investment based credits or incentives. Most companies do not have a control in place for an incentive review prior to undertaking a large project millions of incentive dollars are being left on the table. Selling your product into California or any state for that matter and not collecting tax on an otherwise taxable product states are trying to close their tax gaps by vigorously auditing companies/transactions that require inspection or customs review for shipment into a state. If the state can prove your company had nexus, this liability can come back to you.

20 TOP 11 STATE TAX ISSUES CONTINUED Detailed analysis of your revenue streams and apportionment for income taxes. Concentrate on market based sourcing, throwback, throw-out and cost of performance. Many opportunities and pitfalls exist. Recent cost of performance cases may impact this analysis. Sales, transaction (e.g., B&O, CAT etc ) & use tax exposure analysis your auditors may not do much here because of materiality, but you probably have some skeletons in the closet state auditors are working hard to find them! How is your resale & exemption certificate compliance? Do you ever get to looking into the HIRE Act? There is still time. We are going back and certifying eligible employees for both the HIRE Act payroll exemption and the Retention Credit. Have California offices/employees and pay tax? Have you done an Enterprise Zone study yet?

21 TOP 11 STATE TAX ISSUES CONTINUED Reverse audit for sales & transaction taxes paid. Opportunities exist for companies that undertake large capital projects, pay tax on items consumed or used during the manufacture and sale of product or because of law changes. Specific opportunities vary based on industry. Big opportunity for service providers in Washington to review their apportionment for B&O tax. Opportunity also exists in California for sales taxes paid on software sold with equipment. Have known state tax exposures use established voluntary disclosure programs over amnesty programs. You control the process and in most cases are able to get a better deal. Do your homework! Paying significant property tax when is the last time you looked at the value of your property versus what you are being assessed on? Is it time to appeal your assessment do you have ghost assets being taxed? Pay taxes in Oregon? Time to consider buying BETC is now. You can purchase your Oregon tax liability for 67 cents on the dollar. Other states have similar programs.

22 CONTACT Rob O Neill, Partner State & Local Tax Practice (503) Rob.ONeill@mossadams.com