Counsel on State Taxation. Current Developments in the Mid-West States

Transcription

1 Current Developments in the Mid-West States

2 Presenters John Heithaus Senior Manager Justin Cupples Senior Manager Page 2

3 Learning Outcomes Discuss the key judicial, legislative, regulatory, and administrative developments of the past year Identify and discuss state income tax trends and issues Evaluate the impact of state income tax changes on a variety of business scenarios Page 3

4 Agenda 2014 legislative round-up Other judicial and administrative developments of FY 2014 Page 4

5 2014 legislative round-up Mid-West Page 5

6 2014 state income/franchise tax legislative scorecard Key: Green enacted; Red dead; Purple Vetoed; Black proposed Rate decreases Rate increases Allocation and Apportionment Filing options Tax base Corporate income: AZ, DC, ID, IL, IN, IA, MD, MO, NE, NM, NY, RI, VA and WV Personal income tax: DC, MO, NE, OH, OK, SC, WI Personal income tax from pass-through entities: MO, OH Business entity fees: FL, IL Repeal: Business entity tax: CT; Corporate net worth tax: GA; Phase-out corporate income tax MS, MO; Repeal corporate minimum tax: RI Corporate income tax: IL Personal income: IL, NYC Pass-through Entity Fees: DE Increased income tax exemption: FL Corporate surcharge: NJ Market sourcing: KY, NM, NY, RI, SD Single sales factor: DC, KY, MO (amendments), NY, RI Discretionary Authority: MS, MO Combined reporting: KY, MD, NM (banks only), NY, RI Consolidated Returns: VT Nexus: NY, Amend NOL provisions: ID, NJ, NY, NC, WI Increase income tax exemption: FL Controversy Miscellaneous Amnesty program: LA, MA, MS, MO Independent tax court: AL, KS (modified), LA (modified) Loophole closures: NJ; Tax Haven: ME, MA, RI, WV, WI; Defer FAS 109 deduction: MA Page 6

7 2014 Mid-West State Tax Legislation Kentucky HB 445 provides conformity to the IRC updated to 31 December 2013 (previously 31 December 2006). Indiana SB 1 reduces the corporate income and bank franchise tax rate form 7.5% to 4.9%. Michigan Conforms Michigan to federal treatment of successor status in asset acquisitions under IRC 381 and allowing business loss deduction. Clarifies sourcing rules for dock sales and product stored in transit more than sixty days. Exempts DISC s from CIT. Eliminates intercompany sales between unitary partner and partnership to the extent of interest in flow-through entity from the CIT sales factor; clarifies rules for determining exemptions, credits, and filing thresholds. Mississippi SB 2065 exclude deferred gains and deferred income form the computation of capital, paid-in capital, surplus and retained earnings; reduce capital by the cost of treasury stock effective after 1 July Mississippi HB 799 Equifax fix legislation modernizes alternative apportionment; clarifies who bears the burden of proof. Page 7

8 2014 Mid-West State Tax Legislation Mississippi SB 2933 adopts apportionment method for major medical or pharmaceutical suppliers of a Mississippi distribution facility using a double weighted property and payroll factor, a single sales factor and a denominator of five. Missouri SB 509 provides for the gradual reduction of the Missouri individual income tax rate and creates and individual income tax deduction for business income (rate changes begin 2017 provided that revenue thresholds are met). Missouri SB 662 clarifies that the single sales factor election applies to service companies sourced to the customer location. Vetoed by Governor. Missouri HB 1455 amends burden of proof for the Director of Revenue in asserting tax liabilities. Vetoed by Governor. Oklahoma SB 1246 reduces top individual income tax rate from 5.25% to 4.85% over time. Wisconsin SB 1 increases period in which net business losses can be carried forward up to 20 years (previously 15). Page 8

9 Polling Question: Political analysts project that there are 17 state legislative chambers that are at risk of switching party control this November (11 democrat to republican; 6 republican to democrat). How do you anticipate this impacting your organization s effective tax rate? I expect that this will decrease our effective tax rate. I expect that this will increase our effective tax rate. I don t think this will have any impact on our effective tax rate. I am unsure what effect this will have on our effective tax rate. Page 9

10 Judicial and administrative developments of FY 2014 Page 10

11 Judicial and Administrative Developments Multistate Multistate Tax Commission (MTC) Launches state tax transfer pricing study group. Multistate MTC compact election cases pending in California (Gillette), Michigan (IBM), Minnesota (Kimberly-Clark), Oregon (Healthnet) and Texas (Graphic Packaging). Illinois Witte Brothers Pass-through miles of an interstate trucking company are Illinois revenue miles includable in the numerator of the special Illinois apportionment factor for the transportation industry. Illinois Wendy s International Out-of-state captive insurance company is a bona fide insurance company that cannot be a member of the same unitary business group as noninsurance company parent and affiliates. Illinois LR IT provides guidance on sourcing receipts from cloud computing. Services are deemed received at the location of the customer s office from which the services were ordered in the regular course of business. Page 11

12 Judicial and Administrative Developments Indiana LOF Finnigan does not apply to corporations filing consolidated returns, it only applies to corporations filing a unitary combined tax return. Indiana LOF DOR allowed to use alternative apportionment formulas that (1) required the taxpayer to file a combined report including its parent company and two of its subsidiaries and (2) used an audience factor method to source income in lieu of the statutory costs of performance method Indiana LOF Fashion retailer and service subsidiary operating a distribution and service center outside of Indiana are required to file combined because the companies are in a unitary relationship. Transfer pricing study rejected as out of date and used improper comparables. Indiana LOF intangible licensing and service revenue from franchisees in Indiana should be sourced to Indiana because income producing activity is performed in Indiana. Page 12

13 Judicial and Administrative Developments Indiana LOF An out of state factoring arrangement and purchase of accounts receivable from its in state parent is not conducting the activities of a financial institution and not subject to the FIT. Indiana LOF An out of state intangible holding company earning royalties from two Indiana affiliates has nexus with the state because it earns revenue from recurring activity in the state. Indiana LOF taxpayer avoided throwback by entering into VDA in two states but failed to provide evidence of taxability from business activity in the third. Indiana Revenue Ruling IT Company s storage of its out-of-state clients catalogs at its Indiana facilities prior to distribution did not establish a substantial nexus for its clients sufficient to create an Indiana filing obligation. Kansas Notice Nonresident partners or S corporation shareholders can not claim personal pass-through entity deduction on composite return, must file on separate individual income tax return Page 13

14 Polling Question The MTC continues to pursue a joint transfer pricing audit program, and is strongly considering the use of 3 rd party economics firms. How concerned is your organization about the implications of such a program? Very concerned - We ve been through 3 rd party transfer pricing audits and they were painful. Moderately concerned We haven t been through a 3 rd party transfer pricing audit, but we think it s only a matter of time. A little concerned We don t get audited much, and are pretty confident that our state transfer pricing issues are beyond reproach. Not concerned at all this MTC program is going to die on the vine. Page 14

15 Judicial and Administrative Developments Michigan RAB describes nexus standards for CIT based on (1) physical presence for more than one day, (2) actively soliciting sales of $350K sourced to the state or (3) has an ownership interest in a flow through entity that has nexus with the state. Michigan IBM Michigan Supreme Court permits MTC three factor apportionment election for MBT. Missouri LR 7366 for traditional single sales factor, TPP moved outside the state prior to sale by an unrelated logistics company are partly within the state if sold to a Missouri customer, but wholly outside the state of the customer is located outside the state. Missouri Southwestern Bell Telephone Nexus not created for out-of-state company whose only asset in the state is its interest in a pass-through entity. Missouri Watkins Motor Lines, Inc. Trucking company s income from the sale of its software, customers lists and goodwill is not income from a Missouri source and, therefore, is not subject to income tax. Page 15

16 Judicial and Administrative Developments Mississippi Isle of Capri Casino permits the use of license fee credit of one entity to offset an affiliate s MS income in a combined return based on joint and several liability provisions. Oklahoma CDR Systems State supreme court upholds capital gains deduction for instate companies on constitutional grounds. Texas Newpark Resources In determining whether combined group member is entitled to take a COGS deduction, the member is viewed within the context of the overall business, not as an isolated business. Texas Titan Transportation Appellate court expands Franchise Tax revenue exclusion for flow-through payments to subcontractors that provide construction-related services, labor or materials. Page 16

17 Summary Page 17

18 Questions Page 18