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Income Tax

MTC Marketplace Seller Voluntary Disclosure Initiative Underway

by McDermott Will & Emery, Eric D. Carstens and Stephen P. Kranz | Aug 18, 2017 | District of Columbia, Incentives, Income Tax, Interest and Penalties, Massachusetts, Minnesota, Missouri, Nationwide Importance, Nexus, North Carolina, Sales Tax, Tennessee, Transaction Taxes

Yesterday, the application period opened for the limited-time MTC Marketplace Seller Voluntary Disclosure Initiative opened and it will close October 17, 2017. Since our last blog post on the topic detailing the initiatives terms, benefits and application procedure, six additional states (listed below) have signed on to participate in varying capacities. The lookback period being offered by each of the six states that joined this week is described below.

District of Columbia: will consider granting shorter or no lookback period for applications received under this initiative on a case by case basis. DC’s standard lookback period is 3 years for sales/use and income/franchise tax.
Massachusetts: requires compliance with its standard 3-year lookback period. This lookback period in a particular case may be less than 3 years, depending on when vendor nexus was created.
Minnesota: will abide by customary lookback periods of 3 years for sales/use tax and 4 years (3 look-back years and 1 current year) for income/franchise tax. Minnesota will grant shorter lookback periods to the time when the marketplace seller created nexus.
Missouri: prospective-only for sales/use and income/franchise tax.
North Carolina: prospective-only for sales/use and income/franchise tax. North Carolina will consider applications even if the entity had prior contact concerning tax liability or potential tax liability.
Tennessee: prospective-only for sales/use tax, business tax and franchise and excise tax.

Practice Note

The MTC marketplace seller initiative is now up to 24 participating states. It is targeting online marketplace sellers that use a marketplace provider (such as the Amazon FBA program or similar platform or program providing fulfillment services) to facilitate retail sales into the state. In order to qualify, marketplace sellers must not have any nexus-creating contacts in the state, other than: (1) inventory stored in a third-party warehouse or fulfillment center located in the state or (2) other nexus-creating activities performed by the marketplace provider on behalf of the online marketplace seller.

While Missouri, North Carolina and Tennessee have signed on to the attractive baseline terms (no lookback for sales/use and income/franchise tax), Minnesota and Massachusetts are requiring their standard lookback periods (i.e., 3+ years). Thus, these two states (similar to Wisconsin) are not likely to attract many marketplace sellers. The District of Columbia’s noncommittal case-by-case offer leaves a lot to be determined, and their ultimate offer at the end of the process could range from no lookback to the standard three years.

MTC Offers 18 State Marketplace Seller Amnesty Initiative

by McDermott Will & Emery, Eric D. Carstens and Stephen P. Kranz | Aug 8, 2017 | Incentives, Income Tax, Interest and Penalties, Nationwide Importance, Nexus, Sales Tax, Transaction Taxes

The Multistate Tax Commission (MTC) is moving quickly to implement a multistate amnesty program through its current National Nexus Program (NNP) for sellers making sales through marketplaces. The new MTC marketplace seller amnesty program is limited to remote sellers (3P sellers) that have nexus with a state solely as the result of: (1) having inventory located in a fulfillment center or warehouse in that state operated by a marketplace provider; or (2) other nexus-creating activities of a marketplace provider in the state. Other qualifications include: (1) no prior contact/registration with the state; (2) timely application during the period of August 17, 2017 through October 17, 2017; and (3) registration with the state to begin collecting sales and use tax by no later than December 1, 2017, and income/franchise tax (to the extent applicable) starting with the 2017 tax year.

The baseline guarantee is prospective-only (beginning no later than Dec. 1, 2017) tax liability for sales and use and income/franchise tax, including waiver of penalties and interest. The program also attempts to ensure confidentiality of the 3P seller’s participation by prohibiting the states and MTC from honoring blanket requests from other jurisdictions for the identity of taxpayers filing returns. Note, however, that the confidentiality provision would still allow for disclosure of the content of the agreement in response to: (1) an inter-government exchange of information agreement in which the entity provides the taxpayer’s name and taxpayer identification number; (2) a statutory requirement; or (3) a lawful order.

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Implications of Federal Partnership Audit Rules for State and Local Taxation

by McDermott Will & Emery | Aug 1, 2017 | Federal Tax, Income Tax, Nationwide Importance

The new federal partnership income tax audit rules, scheduled to take effect on January 1, 2018, will have significant implications for the state and local taxation of partnerships and their partners. Most, but not all, states that impose a net income-based tax adopt by reference the federal definition of taxable income, but those that do typically adjust that income to reflect differences between state and federal tax policies. Moreover, state revenue departments generally do not regard themselves as being bound by Internal Revenue Service interpretations of the Internal Revenue Code even when substantive Code provisions are incorporated into state law by reference. The federal statutory rules relating to partnership audits are procedural rules and not ones of substantive tax law, so they will not be automatically adopted by states that generally conform to Internal Revenue Code provisions relating to taxable income. State legislatures may decide to adopt some or all of the federal statutory rules, or they may decide to adopt none of them. Arizona has already adopted its own version of the federal rules, and other state revenue departments are considering recommending to their legislatures that the legislatures take similar action, but most states have not reacted to the federal rules at this time. (more…)

House Judiciary Subcommittee to Consider Sensenbrenner Bill Tomorrow

by McDermott Will & Emery, Eric D. Carstens and Stephen P. Kranz | Jul 24, 2017 | Audits, Constitutional Issues, Income Tax, Local Tax, Nationwide Importance, Nexus, Sales Tax, Transaction Taxes

The No Regulation Without Representation Act of 2017 (NRWRA) is scheduled for a hearing before the House Judiciary Subcommittee on Regulatory Reform, Commercial and Antitrust Law on Tuesday, July 25 at 10:00 am EDT in 2141 Rayburn House Office Building. The bill was introduced by Congressman Jim Sensenbrenner (R-WI) last month with House Judiciary Chairman Bob Goodlatte (R-VA) as one of seven original co-sponsors. As described in more detail below, the bill would codify the Bellas Hess “physical presence” requirement upheld by the US Supreme Court in Quill and make that requirement applicable to sales, use and other similar transactional taxes, notice and reporting requirements, net income taxes and other business activity taxes. Extending the concept to an area far beyond state taxation, the bill would also require the same physical presence for a state or locality to regulate the out-of-state production, manufacturing or post-sale disposal of any good or service sold to locations within its jurisdictional borders.

In the last Congress, the Business Activity Tax Simplification Act of 2015 (BATSA) would have codified a physical presence requirement in the context of business activity taxes (e.g., net income and gross receipts taxes). However, the scope of NRWRA’s limitations on interstate regulation and tax differs from the standard set forth in BATSA. Specifically, under BATSA, assigning an employee to a state constitutes physical presence, whereas under NRWRA a company does not have physical presence until it employs more than two employees in the state (or a single employee if he or she is in the state and provides design, installation or repair services or “substantially assists” in establishing or maintaining a market). Under NRWRA, activities related to the potential or actual purchase of goods or services in the state or locality are not a physical presence if the final decision to purchase is made outside of the jurisdiction. (more…)

Tax Changes Implemented As Part of Revenue Package Supporting Illinois Budget

by Mary Kay McCalla Martire | Jul 7, 2017 | Illinois, Income Tax, Sales Tax

Yesterday afternoon, after months of wrangling and a marathon 4th of July weekend session, the Illinois House of Representatives voted to override Governor Bruce Rauner’s veto of Senate Bill (SB) 9, the revenue bill supporting the State’s Fiscal Year (FY) 2017-2018 Budget. The vote ended Illinois’ two year budget impasse and may avoid a threatened downgrade of Illinois bonds to junk status. The key tax components of the bill as enacted Public Act 100-0022 (Act) are as follows:

Income Tax

Rate increase. Income tax rates are increased, effective July 1, 2017, to 4.95 percent for individuals, trusts and estates, and 7 percent for corporations.

Income allocation. The Act contains a number of provisions intended to resolve questions regarding how income should be allocated between the two rates in effect for 2017.

Illinois Income Tax Act (IITA) 5/202.5(a) provides a default rule, a proration based on the days in each period (181/184), for purposes of allocating income between pre-July 1 segments and periods after the end of June when rates increase. Alternatively, IITA 5/202.5(b) provides that a taxpayer may elect to determine net income on a specific accounting basis for the two portions of their taxable year, from the beginning of the taxable year through the last day of the apportionment period, and from the first day of the next apportionment period through the end of the taxable year.

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Favorable Guidance from the New Jersey Tax Court on the ‘Unreasonable’ Exception to the Related-Party Intangible Expense Add-back

by McDermott Will & Emery | Jun 29, 2017 | Audits, Income Tax, New Jersey, Nexus, Tax Base, Transfer Pricing

In a recent decision, the New Jersey Tax Court provided some long-awaited guidance on the “unreasonable” exception to the state’s related-party intangible expense add-back provision. In BMC Software, Inc v. Div. of Taxation, No 000403-2012 (2017), the Tax Court held that payments made by a subsidiary to its parent for a software distribution license were intangible expenses that were subject to the add-back provision, but that the statutory exception for “unreasonable” adjustments applied so that the subsidiary was able to deduct the expenses in computing its Corporation Business Tax (CBT). The court first determined that the expense was an intangible expense and not the sale of tangible personal property between the entities because the contract specifically called the fee a royalty, the parent reported the income as royalty income and the parent retained full ownership of the intellectual property rights indicating that no sale had taken place. Thus, the court determined that the intangible expense add-back provision did apply. The most interesting aspect of this case, however, was the court’s application of the “unreasonable” exception to the intangible expense add-back provision because that had not yet been addressed by the courts in New Jersey.

The Tax Court established two critical points with respect to the add-back of related-party intangible expenses: first, that the “unreasonable” exception does not require a showing that the related-party recipient paid CBT on the income from the taxpayer; and secondly, that a showing that the related-party transaction was “substantively equivalent” to a transaction with an unrelated party is sufficient evidence that the add-back is “unreasonable.” (more…)

Update on Illinois Legislative Session

by Mary Kay McCalla Martire | Jun 13, 2017 | False Claims Act, Illinois, Income Tax

On May 31, the Illinois General Assembly closed its regular legislative session, without a budget agreement.

Senate Bill 9

As we previously reported, the Senate passed a modified version of Senate Bill 9 (Bill), a tax proposal that is part of the Illinois “Grand Bargain” that we described in a previous post. The version of Senate Bill 9 that passed out of the Senate passed the House Revenue Committee on May 29 on a partisan vote. The House has extended the Bill’s final action deadline to June 30.

The current version of the Bill is similar but not identical to the version that we have previously described. Some of the more significant amendments include the following:

Two New Taxes. The Bill now proposes to create two new taxes. The “Video Service Tax Modernization Act” purports to impose a tax on satellite television and streaming television services at a rate of 5 percent of the gross revenues that a provider earns from its Illinois customers. The Bill also creates the “Entertainment Tax Fairness Act” which seeks to tax viewing “entertainment,” defined as “paid video programming whether transmitted by cable service, direct-to-home satellite service, direct broadcast satellite service, digital audio-visual works service, or video service.” The tax rate is 1 percent of charges paid by the customer. Both taxes exempt satellite or subscription radio services and can be passed-through and collected from customers.

Income Tax. The Bill now proposes to increase income tax rates for individuals, trusts and estates to 4.95 percent (rather than the previously proposed 4.99 percent rate). Also, the tax rate increases, including the increase to 7 percent for corporations (corporate increase unchanged from the Bill’s prior version), continue to be permanent.

Sales Tax Base Expansion. The current version of the Bill removes repair and maintenance services, landscaping services, cable television services (but see “Two New Taxes” described above) and some personal care services (including nails and hair removal) from the Bill’s expansion of the Illinois sales tax base.

It is difficult to predict whether any portion of Senate Bill 9 will be enacted. Since the Illinois General Assembly’s regular sessions have now ended, legislative approval will require a three-fifths majority and, to date, the governor has refused to endorse the legislation.

Senate Bill 1577

We have previously reported on Senate Bill 1577, which proposes to increase the penalty amounts imposed for violation of the Illinois False Claims Act. The bill passed the House on May 30 with the exception for certain low dollar tax claims as previously described.

Illinois Bills to Watch

by Catherine A. Battin and Mary Kay McCalla Martire | May 24, 2017 | False Claims Act, Illinois, Income Tax, Interest and Penalties, Nexus, Sales Tax, Unclaimed Property

Just days away from the May 31 close of its regular legislative session, the Illinois General Assembly has yet to enact the comprehensive series of tax and budget reforms that were first proposed by the Illinois Senate leadership late last year. Yesterday, the Senate passed a modified version of Senate Bill (SB) 9, the tax proposal we described in a previous post, without any Republican support. SB 9 now moves to the Democratically-controlled House for consideration. Even if approved by the House, it seems likely that Illinois’ Republican Governor will veto the legislation. (more…)

Tax Highlights of Proposed Illinois “Grand Bargain”

by Mary Kay McCalla Martire | Mar 14, 2017 | False Claims Act, Illinois, Income Tax, Local Tax, Sales Tax

In an effort to resolve Illinois’ 20-month budget impasse, the Illinois Senate leadership (Senate Majority Leader John Cullerton and Senate Minority Leader Christine Rodogno) have jointly proposed a series of bills to increase revenue, reduce spending, and respond to the Illinois Governor’s concerns regarding pension reforms, workers compensation reform and property tax relief. A series of twelve bills have been introduced, all of which are interlinked for passage. The bills are termed the Illinois “Grand Bargain.” Most of the tax-related changes are found in Senate Bill 9. The current version of the Senate Bill 9 (Amendment 3) (“Bill”) was submitted on March 3 and includes the following proposed changes: (more…)

NCSL Task Force on SALT Meets in Anticipation of Active Legislative Sessions

by McDermott Will & Emery, Eric D. Carstens and Stephen P. Kranz | Jan 17, 2017 | Audits, Constitutional Issues, Federal Tax, Income Tax, Nationwide Importance, Nexus, Sales Tax, Tax Base, Transaction Taxes

On Saturday, January 14, the National Conference of State Legislatures (NCSL) Task Force on State and Local Taxation (Task Force) met in Scottsdale, Arizona to discuss many of the key legislative issues that are likely to be considered by states in 2017. The Task Force consists of state legislators and staff from 33 states and serves as an open forum to discuss tax policy issues and trends with legislators and staff from other states, tax practitioners and industry representatives.

Below is a short summary of the key sessions and takeaways from the first Task Force meeting of 2017. PowerPoints from all sessions are available on the Task Force website.

Nexus Expansion Legislation Expected to Continue

With lawsuits pending in South Dakota and Alabama over actions taken by states in 2016, MultiState Associate’s Joe Crosby provided an overview of 2016 nexus expansion legislation (as well as legislation introduced thus far in 2017), with NCSL’s Max Behlke pointing out that he expects a lot of states to act on this trend this year.

In particular, it was pointed out that the US Supreme Court’s denial of cert in DMA v. Brohl (upholding the decision of the 10th Circuit) should give states confidence about their ability to constitutionally adopt similar notice and reporting laws. Last month, Alabama Revenue Commissioner Julie Magee publicly stated that Alabama plans to introduce notice and reporting legislation similar to Colorado, along with at least two other states.

Economic nexus laws directly challenging Quill, similar to South Dakota SB 106 passed last year, are also expected to be prevalent in 2017—with five states (Mississippi, Nebraska, New Mexico, Utah and Wyoming) already introducing bills or formal bill requests that include an economic nexus threshold for sales and use tax purposes. Notably, the Wyoming bill (HB 19) has already advanced through the House Revenue Committee and its first reading by the Committee of the Whole and is expected to receive a final vote in the House this week. The Nebraska bill (LB 44) takes a unique approach in that it would impose Colorado-style notice and reporting requirements on remote sellers that refuse to comply with the economic nexus standard.

Behlke pointed out that he doesn’t see Congress acting on the remote sales tax issue in early 2017 due to other priorities—including federal tax reform. With a final resolution of the kill-Quill efforts by the US Supreme Court most likely not possible until late 2017 (or later), state legislatures are likely to feel the need to take matters into their own hands. From an industry perspective, this presents a host of compliance concerns and requires companies currently not collecting based on Quill to closely monitor state legislation. This is especially true given the fact that many of the bills take effect immediately upon adoption.

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