INSIDE SALT
INSIDE SALT
In-Depth Coverage of Issues Surrounding State and Local Tax
INSIDE SALT
In-Depth Coverage of Issues Surrounding State and Local Tax
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Illinois Proposed Regulations Governing Apportionment of Income for Transportation Companies Moving Forward

by | Nov 19, 2015 | , ,

On November 17, the Illinois Joint Committee on Administration Rules approved a proposed regulation promulgated by the Illinois Department of Revenue (Department) implementing statutory changes to the apportionment formula for business income derived from providing transportation services. The changes are effective for tax years ending on or after December 31, 2008. See Prop. 86 Ill. Admin. Code § 100.3450 (Regulation).

The Regulation reflects recent statutory changes made to the apportionment formulas for both non-airline and airline transportation services. See 35 ILCS 5/304(d). It provides definitions of key terms, including “revenue mile” and “In this State.”

As finalized, the Regulation incorporates certain industry comments to the Department’s initial draft of the Regulation (See TFI comments) by adding a definition of “freight” and deleting language that created inconsistency in the definition of “revenue mile.” The Regulation does not reflect taxpayer criticisms of the language regarding the “transaction-by-transaction” approach in subpart (b)(4). This subpart states that in a “transaction” where a taxpayer transports a passenger or freight both by air and otherwise, gross receipts from airline services is equal to the portion of the total gross receipts from the “transaction” that is representative of airline miles or “any other reasonable method supported by … books and records.” In many cases in the transportation industry, tracking revenue on a transactional basis and per mode of transportation is not practical and is not an industry norm. Nor is it required by statute. Although the regulatory provision’s allowance of “any other reasonable method” could be helpful, its ambiguity provides little certainty to taxpayers regarding what alternative methodology would be acceptable to the Department.



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Tax Haven List Repealed by D.C. Council

by , , and | Nov 3, 2015 | ,

After being in effect for only a week, the Council of the District of Columbia (Council) unanimously enacted legislation today that will repeal the list of tax haven jurisdictions specifically enumerated in the D.C. Code. The legislation, titled the Fiscal Year 2016 Second Budget Support Clarification Emergency Amendment Act of 2015 (Act), was introduced on September 22, 2015, after the list created an uproar from singled-out countries and the business community alike. The tax haven list was passed on August 11, 2015, as part of the Fiscal Year 2016 Budget Support Act of 2015 (BSA), which became effective on October 22, 2015. The inclusion of the tax haven list in the BSA was as a supplement to the tax haven criteria that already existed in the D.C. Code.

As passed today, Section 6 of the Act repeals the tax haven list (and accompanying language) added by the BSA in August and restores the relevant D.C. Code provisions to their pre-BSA state. Thus, effective immediately, the tax haven standard established by D.C. Code § 47-1801.04(49), as amended, is as follows:

“(A) ‘Tax haven’ means a jurisdiction that:

(i) For a particular tax year in question has 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 regarding taxpayers benefitting from the tax regime;

(ii) Lacks transparency, which, for the purposes of this definition, means that the details of legislative, legal, or administrative provisions are not open to public scrutiny and apparent or are not consistently applied among similarly situated taxpayers;

(iii) Facilitates the establishment of foreign-owned entities without the need for a local substantive presence or prohibits these entities from having any commercial impact on the local economy;

(iv) Explicitly or implicitly excludes the jurisdiction’s resident taxpayers from taking advantage of the tax regime’s benefits or prohibits enterprises that benefit from the regime from operating in the jurisdiction’s domestic market; or

(v) Has created a tax regime that is favorable for tax avoidance, based upon an overall assessment of relevant factors, including whether the jurisdiction has a significant untaxed offshore financial or other services sector relative to its overall economy.

(B) For the purposes of this paragraph, the term “tax regime” means a set or system of rules, laws, regulations, or practices by which taxes are imposed on any person, corporation, or entity, or on any income, property, incident, indicia, or activity pursuant to governmental authority.”

Practice Note

Because only the tax haven list provisions—and not the historic tax haven criteria—were repealed today, the criteria will be the sole determiners of whether a jurisdiction is a tax haven for District Income and Franchise Tax purposes. The legislation enacted today was done on an emergency basis, with an identical temporary bill unanimously advancing for a third reading. This means that the repeal will be effective immediately, but will require subsequent permanent legislation to continue its effect beyond the 90 and 225 day (if the temporary [...]

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Economic Presence Standard for Income Tax Nexus

by | Oct 6, 2015 | , ,

In a question of first impression for Illinois, on May 12, 2015, Judge Schmidt of the Circuit Court of Sangamon County granted a summary judgment for the Illinois Department of Revenue, holding that the proper test for corporate income tax nexus is whether a “significant economic presence” exists in Illinois. Capital One Financial Corporation v. Brian Hamer, et al., 2012-TX-0001/02 (5/12/15). The substance of the court’s ruling is found in a docket entry accessible here. Citing Tax Comm’r v. MBNA, 260 S.E.2d 226 (W.Va. 2006), the circuit court found the taxpayer had a significant economic presence in Illinois because it (1) collected “millions of dollars” in fees and interest from Illinois residents, (2) “systematically and continuously” solicited Illinois customers (via telephone, email and direct mail solicitation) to apply for credit, (3) used Illinois courts to collect debts and (4) filed and enforced judgment liens in the state. The circuit court rejected the plaintiff’s argument that physical presence was required to create nexus for income tax purposes, and stated that it agreed with the Illinois Department of Revenue that the significant economic presence test was the “fairest test of corporate income tax given the current internet based world.”

A notice of appeal was filed on June 17, 2015, and the record on appeal (which triggers appellate briefing) was filed on August 6, 2015. Appellate briefing is likely to be completed over the next several months.



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Tax on Tax Credits: U.S. Tax Court Addresses Federal Taxation of Refundable State Credits in Maines

by | Jul 27, 2015 | , ,

As more and more states offer refundable tax credits to induce economic development, it is critical for businesses weighing incentive offers to take into consideration the federal income tax implications of an award. While a payment may be called a “credit” and claimed on a state tax return, that payment might nonetheless constitute taxable income for federal tax purposes. Imposition of federal income tax on incentive payments can materially reduce their value and should be considered when weighing the potential benefit of an award. A recent United States Tax Court decision, Maines v. Commissioner, demonstrates that risk.

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Seeing Green: New York’s Reformed Brownfields Cleanup Program Creates Opportunities for Redevelopment to Generate Refundable Tax Credits

by | Jul 21, 2015 | , ,

Now is the time to begin brownfield redevelopment projects in the State of New York. Reauthorization of and reforms to New York’s Brownfields Cleanup Program, which provides tax credits to redevelop contaminated properties, came into effect on July 1, 2015. The program has been reauthorized until 2026, giving businesses and developers a chance to remediate brownfields while generating millions of dollars in refundable credits.

State brownfield tax credit programs encourage remediation of contaminated property that might otherwise remain abandoned. New York, with its industrial heritage, has more than its share of such locations. The Brownfields Cleanup Program was started in 2003 as a way to encourage redevelopment of these properties. Once a participating project is granted a certificate of completion, it generates credits calculated as percentages of the site preparation costs and groundwater remediation costs, and of the costs of tangible property (buildings and capital equipment). The site preparation and groundwater remediation costs are the environmental expenses, which generate credits ranging from 22 to 50 percent of costs. The tangible property costs are the redevelopment (generally non-environmental) expenses, which generate credits ranging from 10 to24 percent of costs. Tangible property credits are capped as a multiplier of site preparation and groundwater remediation costs: three times the costs for most projects and six times the costs for manufacturing projects. All brownfields credits are refundable to the extent that they exceed the taxpayer’s income tax or franchise tax otherwise due. Essentially, under the Brownfields Cleanup Program, New York will pay for up to half of a project’s environmental remediation costs and a quarter of other redevelopment costs.

In recent years, the program came under criticism for allegedly excessive credit awards, which sometimes exceeded the overall costs of remediation. The program had been scheduled to expire at the end of the year, and a short-term extension of the program through March 2017 was vetoed by Governor Cuomo as not providing needed reform. The reforms package and reauthorization were enacted with the FY 2016 budget. L. 2015, ch. 56, pt. BB (S. 2006-B / A3006-B). With proposed regulations for some definitional terms pending, the reformed law came into effect for projects approved by the Department of Environmental Conservation on or after July 1, 2015. Preexisting projects are grandfathered in under the old provisions as long as they are completed by the end of 2019 (and projects approved before June 23, 2008, must be completed by the end of 2017). New projects will have until March 31, 2026, to obtain certificates of completion under the reformed Brownfields Cleanup Program.

Key reforms coming into effect include the following:

  • To address a sense that projects do not need as many incentives in the tight New York City real estate market, projects in the city now have to meet one of three special criteria to qualify for the tangible property component of the credits. This special requirement is for tangible property credits only; site preparation and groundwater remediation credits are unrestricted. The three [...]

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California’s Harley-Davidson Decision Rides over Nexus Lines

by | Jul 13, 2015 | , , , ,

On May 28 2015, The California Court of Appeals issued a decision in Harley-Davidson, Inc. v. Franchise Tax Board, 187 Cal.Rptr.3d 672; and it was ultimately about much more than the validity of an election within California’s combined-reporting regime. It also tackled issues and, perhaps most importantly, blurred lines surrounding the Commerce Clause’s substantial nexus requirement. In Harley-Davidson, the court concluded that two corporations with no California physical presence had substantial nexus with California due to non-sales-related activities conducted by an in-state agent. The court applied an “integral and crucial” standard for purposes of determining whether the activities conducted by an in-state agent satisfy Commerce Clause nexus requirements.

The corporations at issue were established as bankruptcy-remote special purpose entities (SPEs) and were engaged in securing loans for their parent and affiliated corporations that conducted business in California. As a preliminary matter, the court found that an entity with a California presence was an agent of the SPEs. The court then concluded that the activities conducted by the in-state agent created California nexus for the SPEs that satisfied both Due Process and Commerce Clause requirements.

The Due Process Clause requires some “minimum connection” between the state and the person it seeks to tax, and is concerned with the fairness of the governmental activity. Accordingly, a Due Process Clause analysis focuses on “notice” and “fair warning,” and the Due Process nexus requirement will be satisfied if an out-of-state company has purposefully directed its activities at the taxing state. In Harley-Davidson, the SPEs purpose was to generate liquidity for the in-state entity in a cost-effective manner so that it could make loans to Harley-Davidson dealers, including dealers in California. Additionally, the SPEs’ loan pools contained more loans from California than from any other state, and the in-state entity oversaw collection activities, including repossessions and sales of motorcycles, at California locations on behalf of the SPEs. As a result, the court concluded that “traditional notions of fair play and substantial justice” were satisfied.

The Commerce Clause requires a “substantial nexus” between the person being taxed and the state. The Supreme Court of the United States has addressed this substantial nexus requirement, holding that a seller must have a physical presence in the taxing state to satisfy the substantial nexus requirement for sales-and-use tax purposes. In Tyler Pipe Industries v. Washington State Department of Revenue, 483 U.S. 232 (1987), the Supreme Court stated that, “the crucial factor governing [Commerce Clause] nexus is whether the activities performed in this state on behalf of the taxpayer are significantly associated with the taxpayer’s ability to establish and maintain a market in this state for the sales.” While Harley-Davidson argued that the activities of the in-state agent could not create nexus for the SPEs, as such activities were not sales-related activities, the California court rejected this argument stating that “this argument fails from the outset, however, because the third-party’s in state conduct need not be sales-related; it need only be an integral and crucial aspect of the businesses” (internal [...]

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Inside the New York Budget Bill: Department Issues Guidance Regarding Investment Capital Identification Procedures

by | Jul 10, 2015 | , , ,

On July 7, 2015, the New York Department of Taxation and Finance issued guidance (TSB-M-15(4)C, (5)I, Investment Capital Identification Requirements for Article 9-A Taxpayers) on the identification procedures for investment capital for purposes of the New York State Article 9-A tax and New York City Corporate Tax of 2015. Income from investment capital is generally not subject to tax in New York. For New York State and New York City corporate income tax purposes, investment capital is investments in stocks that meet the following five criteria:

  1. Satisfy the definition of a “capital asset” under section 1221 of the Internal Revenue Code (IRC) at all times the taxpayer owned the stock during the taxable year;
  2. Are held for investment for more than one year;
  3. The dispositions of which are, or would be, treated by the taxpayer as generating long-term capital gains or losses under the IRC;
  4. For stocks acquired on or after January 1, 2015, have never been held for sale to customers in the regular course of business at any time after the close of the day on which they are acquired; and
  5. Before the close of the day on which the stock was acquired, are clearly identified in the taxpayer’s books and records as stock held for investment in the same manner as required under IRC section 1236(a)(1) for the stock of a dealer in securities to be eligible for capital gain treatment (for stock acquired prior to October 1, 2015, that was not subject to IRC section 1236(a),such identification must occur before October 1, 2015).

Criterion five, regarding identification procedures, has been an area of concern for many New York taxpayers. While identification has been a concern of securities dealers for federal income tax purposes for many years, the New York identification requirement applies to all taxpayers that seek to have stock qualify as investment capital. Thus, all New York taxpayers, many in uncharted waters, must develop appropriate procedures to comply with this new identification requirement. Unfortunately, the Department’s guidance is somewhat sparse and does not address some important issues that could arise and that have been raised with the Department. The guidance also adopts a troubling position with respect to investments made by partnerships.

Securities Dealers

For taxpayers that are dealers subject to IRC section 1236, stock must be identified before the close of the day on which the stock was acquired (with the exception of floor specialists as defined in IRC section 1236(d) that have stock subject to the seven-day identification period in IRC section 1236(d)(1)(A)) as held for investment under IRC section 1236(a)(1) to satisfy the New York investment capital identification requirement. The presence or absence of a federal identification under IRC section 1236(a)(1) will be determinative, and a separate New York identification will not be allowed. A federal identification under IRC section 475 (relating to marked to market rules) is insufficient.

As a practical matter, many securities dealers that are taxed as corporations for federal income tax purposes do not comply with [...]

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Join McDermott Partners at the NYU SPS 2015 Summer Institute in Taxation

by | Jul 1, 2015 | , , , ,

July 13-24, 2015
New York, NY

Join today’s leading national and international tax authorities, including McDermott partners Art Rosen, Peter Faber, Alysse McLoughlin and Mary Kay Martire, for the NYU SPS 2015 Summer Institute in Taxation. The institute will feature a series of in-depth sessions on state and local taxation, partnerships, consolidated returns, trusts and estates, federal wealth tax and international taxation.

To register or for more information, please click here.



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House Judiciary Committee Approves Three State Tax Bills

by , , and | Jun 18, 2015 | , , , , , ,

Yesterday, on June 17, 2015, three state tax bills were favorably reported to the United States House of Representatives (House) by the House Judiciary Committee (House Judiciary) after considering each during a half-day markup. The bills that were advanced included: (1) the Mobile Workforce State Income Tax Simplification Act (Mobile Workforce, H.R. 2315); (2) the Digital Goods and Services Tax Fairness Act (DGSTFA, H.R. 1643); and (3) the Business Activity Tax Simplification Act (BATSA, H.R. 2584).

Mobile Workforce State Income Tax Simplification Act

The Mobile Workforce bill was the first considered and seeks to establish a clear, uniform framework for when states may tax non-resident employees that travel for work. As advanced, the bill generally allows states to impose income tax compliance burdens on non-resident individuals only when the non-resident works in a state other than their state of residence for more than 30 days in a year. The bill also prevents those states from imposing a withholding requirement on employers for wages paid to such employees. Three proposed amendments seeking to limit the adverse revenue impact to New York were discussed and rejected. The Mobile Workforce bill was then favorably reported to the House by a vote of 23-4.

Digital Goods and Services Tax Fairness Act

DGSTFA would implement a uniform sourcing framework for states and localities seeking to tax digital goods and services. In doing so, the bill prevents any state or locality from imposing multiple or discriminatory taxes. Of the three pieces of legislation considered yesterday, only the DGSTFA was amended. The amendment, offered by the bill’s lead sponsor Representative Lamar Smith, was technical in nature and did not change the basic protections the bill would provide. At the markup, Chairman Goodlatte noted that the National Governors Association (NGA), which had previously voiced objections, was no longer opposed to the legislation after the revisions—though the NGA testimony indicated that the organization could not support the legislation without addressing the remote seller sales tax nexus issue.

The first technical changes in the adopted amendment were to the definitions of delivered or transferred electronically and provided electronically. The amendment added the term digital good and digital service after each respective term of art to clarify that digital goods are delivered or transferred electronically, whereas digital services are provided electronically. The second technical change was to the definition of digital good. In modifying the term, the amendment clarifies that streaming and other similar digital transmissions that do not “result in the delivery to the customer of a complete copy of such software or other good, with the right to use permanently or for a specified period” are not digital goods and would instead fall under the definition of a digital service.

Business Activity Tax Simplification Act

BATSA would codify the prerequisite of physical presence for a state to impose a direct tax on a non-resident business. BATSA would modernize the existing federal protection against state income taxation offered under P.L. 86-272 to include solicitation for sales of intangible property and services [...]

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Tax Amnesty Hits the Midwest (and Beyond)

by , and | Jun 12, 2015 | , , , , , , , , , , , , ,

With many state legislatures wrapping up session within the past month or so, there has been a flurry of last-minute tax amnesty legislation passed. Nearly a half-dozen states have authorized upcoming tax amnesty periods. These tax amnesties include a waiver of interest and, in some circumstances, allow taxpayers currently under audit or with an appeal pending to participate. This blog entry highlights the various enactments that have occurred since the authors last covered the upcoming Maryland amnesty program.

Missouri

On April 27, 2015, Governor Jay Nixon signed a bill (HB 384) that creates the first Missouri tax amnesty since 2002. The bill creates a 90-day tax amnesty period scheduled to run from September 1, 2015, to November 30, 2015. The amnesty is limited in scope and applies only to income, sales and use, and corporation franchise taxes. The amnesty allows taxpayers with liabilities accrued before December 31, 2014, to pay in full between September 1, 2015, and November 30, 2015, and be relieved of all penalties and interest associated with the delinquent obligation. Before electing to participate in the amnesty program, taxpayers should be aware that participation will disqualify them from participating in any future Missouri amnesty for the same type of tax. In addition, if a taxpayer fails to comply with Missouri tax law at any time during the eight years following the agreement, the penalties and interest waived under the amnesty will be revoked and become due immediately. Finally, taxpayers who are the subject of civil or criminal state-tax-related investigations, or are currently involved in litigation over the obligation, are not eligible for the amnesty.

According to the fiscal note provided in conjunction with the bill, the state estimates that 340,000 taxpayers will be eligible for the amnesty and that the program will raise $25 million.

Oklahoma

On May 20, 2015, Governor Mary Fallin signed a bill (HB 2236) creating a two-month amnesty period from September 14, 2015, to November 13, 2015. The bill allows taxpayers that pay delinquent taxes (i.e., taxes due for any tax period ending before January 1, 2015) during the amnesty period to receive a waiver of any associated interest, penalties, fines or collection costs.

Taxes eligible for the amnesty include individual and corporate income taxes, withholding taxes, sales and use taxes, gasoline and diesel taxes, gross production and petroleum excise taxes, banking privilege taxes and mixed beverage taxes. Notably, franchise taxes are not included in this year’s amnesty (they were included in the 2008 Oklahoma amnesty).

Indiana

In May, Governor Mike Pence signed a biennial budget bill (HB 1001) that included a provision authorizing the Department of Revenue (Department) to implement an eight-week tax amnesty program before 2017. While the Department must promulgate emergency regulations that will specify exact dates and procedures, several sources have indicated that the amnesty is expected to occur sometime this fall. The upcoming amnesty will mark the second-ever amnesty offered by Indiana (the first occurred in 2005). Taxpayers that participated in the 2005 program [...]

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