What’s Happening Tuesday December 13, 2011
Hosted by • Ginny Buckner Kissling • Principal, Ryan, LLC Ann Curry & Matt Lauer Fred Marcus Principal, Horwood, Marcus, and Berk, Chtd. with Doug Lindholm & William McArthur Council on State Taxation Tyco Electronics Chris Matthews & David Gregory
Program • Dale Busacker, Minnesota • Mike Yopp, Tennessee • Donna Lecky, Alabama • Eric Coffill, California • Jason Wyman, Illinois • Mark Eidman, Texas • Fred Nicely, Ohio • Pat Van Tiflin, Michigan
Program • Kurt Kawafuchi, Hawaii • John Barrie, Missouri / D.C. • Jonathan Block, Maine / New Hampshire • Jason Zorfas, Massachusetts • James Wetzler, New York • Dick Genetelli, New York • David Shipley, Pennsylvania / New Jersey
NEWS BREAK Presented by Bill Townsend Shareholder Fowler White Boggs Banker LLP Marc Simonetti Partner Sutherland Asbill & Brennan &
FEATURING SPECIAL GUESTS: Mr. Mark Eidman Partner Scott, Douglass & McConnico LLP Austin, Texas Mr. Fred Nicely Tax Counsel Council On State Taxation Washington, DC Mr. Patrick Van Tiflin Partner Honigman, Miller, Schwartz, and Cohn LLP Lansing, Michigan
FEATURING SPECIAL GUESTS: Mr. James Wetzler Director, Multi-State Tax Group Deloitte Tax LLP New York, New York Mr. Richard Genetelli President The Genetelli Consulting Group New York, New York Mr. David Shipley Partner McCarter & English, LLP Philadelphia, Pennsylvania
PowerPoint Presentation • To access this presentation, go to: • www.saltlawyers.com
Minnesota Developments • Mr. Dale Busacker • Director, State and Local Taxes • Grant Thornton LLP • Minneapolis, Minnesota
2011 Legislative Update • Federal Income Tax Update Through April 14, 2011 • Adjustment continued for bonus depreciation and Section 179 expensing • Sales tax – data center exemption • Ban on contingency fee tax compliance assistance contracts with vendors • Ringtones are no longer subject to sales tax
Pending Litigation • R. J. Reynolds Tobacco Company • In 1999, R. J. Reynolds Tobacco Company (Reynolds) and affiliates sold the international tobacco brands and operations of an affiliate located in Switzerland. Reynolds included the gain as apportionable business income and included the gain in the sales factor denominator. • The Department issued its audit excluding the gain from the sales factor denominator. • Reynolds protested the assessment and filed a refund claim taking the position that the gain is nonbusiness income. • The Department denied the protest and the refund claim. • Reynolds filed in Tax Court and the Court heard the summary judgment motion on April 27, 2011.
Pending Litigation • SAP Retail, Inc. • SAP sold $11.5 million of prewritten software to Best Buy along with $7 million of consulting and professional services. • The Department assessed sales tax on these services as fabrication labor or as installation charges. The Department exempted invoices where the software code was modified. • SAP's position is that these services are exempt consulting and professional services. SAP especially objects to the Department assessing tax on reimbursements that it received from Best Buy for expenses that its employees paid for airfare, car rental, hotel charges and meals.
Pending Litigation • Express Scripts, Inc. • Issue 1 – Taxpayer asserts that since they own only a 1/3 interest in the partnership, the partnership income or loss is directly allocated as non-unitary, non-business income. • Issue 2 – Taxpayer asserts that the statute does not require apportionment of the Section 382 limit on the use of NOL carryovers.
Pending Litigation • SBC DataComm, Inc. • Taxpayer is taking the position that holding companies whose only asset is holding an interest in US partnerships qualify as a foreign operation company during 2000 and 2001. The position is that the apportionment factors don't flow up in the determination if the entity qualifies as an FOC. The FOC qualification laws were significantly changed in 2005 and in 2008.
Administrative Update • Worker Classification Voluntary Compliance • Initiative expires December 16 • Pay 3% tax on compensation paid to affected workers during 2010 and treat them as employees going forward • Waiver of penalties and interest and prior liabilities • E-services online filing and paying system • Filing returns and paying taxes • Viewing correspondence and receiving messages
Tennessee Developments • Mr. Mike Yopp • Partner • Waller Lansden Dortch & Davis, LLP • Nashville, Tennessee
Alabama Developments • Ms. Donna M. Lecky • Vice President, Tax • Omnicare, Inc. • Covington, Kentucky
Business/Nonbusiness Income Functional and transactional changed from “and” to “or” Blue Bell Creameries, LP v. Roberts - Capital gains from redemption of stock are Business Earnings - sale was unrelated to ice cream but materially contributed to Blue Bell’s earnings Heinz v. Farr – Same result Lesson: Any sale in Tennessee will be business earnings.
Legislative Developments • Incentives added for firms already head quartered in Tennessee that remodel or renovate • Gain from deemed sale of Goodwill in Sec. 338 Election excluded from both numerator and denominator of Receipts Factor • Refund claims may now be extended by agreement – eliminates necessity for litigation • Interest on refund claim legislation passed last year in dispute
Revenue and Letter Rulings • After two year hiatus is rulings, approximately 30 rulings released since change in administration • Will not give duplicate rulings – but will give comfort letter • Expedited Rulings; $10,000; 7 day/60 day
Variance Procedure • Comptroller studied the issue and noted that under Commissioners Chumley and Farr use increased significantly • Unlike penalty and refunds which can be reviewed by Tennessee Attorney General office, no way to monitor variances. • Expect variance legislation
Other Cases • CAO Holdings, Inc. v. Trost - In order to pierce have a sham transaction ..., two principles apply. First, “[f]orm and structure are frequently … controlling… .” Second, taxpayers can arrange their affairs to minimize taxes • Signal Mountain Cement – Federal capitalization rules do not control Tennessee property tax valuation – exclude freight, sales tax, installation costs
Alabama Developments • Ms. Donna M. Lecky • Vice President, Tax • Omnicare, Inc. • Covington, Kentucky
Alabama Developments Corporate Income Taxes: Double Weighted Sales Factor and Market-Based Sourcing. Amendment of Act 2011-616. The Tariff Credit Act 2011-648 and Related Challenges: Gibson v. Bentley, Case No. CV 2011-900998 (August 3, 2011). IRC Section 199: Domestic Production Activities Deduction: Taxable income limitation. GKN Westland Aerospace, Inc. v State DOR, Admin. Law Div. Dkt. No. BIT. 10-988 (July 25, 2011). Sales and Use Tax: Alabama Streamlined Sales Tax Commission Issues Landmark Report. Outlook for 2012: Alabama Taxpayers Bill of Rights, H.B. 427
Act 2011-616 Amended • Alabama’s version of the Multistate Tax Compact amended to double-weight the sales factor in the currently equally weighted 3 factor formula used to apportion income in the State; • The Act amends Alabama’s apportionment methodology by converting the State from a cost of performance to a market source state for certain receipts from intangibles or services. Effective for tax years beginning on or after December 31, 2010; and, • The market-based sourcing rule in the bill closely tracks the Multistate Tax Commissions draft model provision.
The Tariff Credit Act of 2011 • Act 2011-648 is designed to: • Encourage foreign manufacturers to locate in Alabama by providing an income tax credit for investing in qualifying projects; • Minimum capital investment is $100M; • Activities that qualify are industrial, warehousing and research; • The project must create 100 new jobs; and, • The credit shall not exceed the lesser of $20M or 20% of the total amount of the investing Company’s capital investment.
Gibson v. Bentley • Challenge to the Tariff Credit Act by 2 Teachers. Lawsuit funded by the AEA Teachers Union • Basis-Technical Argument: • Section 70 of the 1901 Alabama Constitution requires that all bills for raising revenue must originate in the House of Representatives not the Senate.
GKN Westland Aerospace, Inc. v. State Department of Revenue • Case of First Impression: • Held that a corporate taxpayer properly calculated its IRC Section 199 domestic production activities deduction (“DPAD”) by applying the taxable income limitation on a separate company basis for Alabama tax purposes; • At issue was the income limitation. The Judge reasoned that the taxable income limitation did not apply to the subject years because the Taxpayer had income as a separate company in those years greater that the allowable DPADs; and, • The ADOR did not appeal.
Sales and Use Tax • Alabama Streamlined Sales Tax Commission: • Commission charged with studying the feasibility of the State becoming a member of the Streamlined Sales and Use Tax Agreement; • The Commission, in its preliminary report, agreed that the ADOR would be the ‘single entity administrator’ (“SEA”) should Congress enact certain legislation recently introduced; • If Congressional legislation is enacted along with state conforming legislation, the ADOR would become the SEA for both filing and auditing; and, • Possible outcome: increased annual sales tax revenue ranging $200M to $240M.
Outlook 2012: The Re-Introduction of Alabama H.B. 427 • Introduced in the Spring, 2011: • Would have created an independent tax tribunal-the Alabama Tax Appeals Commission-thus abolishing the Administrative Law Division; • H.B. 427 was passed unanimously by the House last session and received a favorable vote from the Senate Judiciary Committee before stalling in the Senate logjam during the last few days of the session; and, • The bill contained other important provisions such as, • Extending the time period for filing an appeal or petition from 30 to 60 days, and • Eliminating the failure to file penalty for individual taxpayers who are due refunds on a delinquent return \
California Developments • Mr. Eric J. Coffill • Partner • Morrison & Foerster LLP • Sacramento, California
FTB ADMINISTRATIVE DEVELOPMENTS • FTB Notice 2011-06: “Doing Business” Standard
FTB ADMINISTRATIVE DEVELOPMENTS • Results of VCI 2 Program (ended October 31, 2011)
FTB ADMINISTRATIVE DEVELOPMENTS • Adoption of 25138.5 Single Sales Factor Regulation
FTB ADMINISTRATIVE DEVELOPMENTS • Internal “Business Income” Confusion • Appeal of Pacific Bell Telephone (September 20, 2011)
FTB JUDICIAL DEVELOPMENTS • California Taxpayers’ Ass’n v. FTB (2011) • Apple Inc. v. FTB (2011) • The Gillette Co. v. FTB (Multistate Tax Compact Cases)
Illinois Developments • Mr. Jason Wyman • Partner • Deloitte Tax LLP • Chicago, Illinois
Illinois — Legislative Action • SB 2505, P.A. 96-1496 signed January 13, 2011 • Corporate Income Tax Rate • 1/1/2011 – from 4.8% to 7% • 1/1/2015 – from 7% to 5.25% • 1/1/2025 – from 5.25% to 4.8% • Replacement Tax unchanged at 2.5% on corporations • Fiscal Year Taxpayer Impact • Weighted Average • Specific Accounting
Illinois — Legislative Action – Cont'd • SB 2505, P.A. 96-1496 signed January 13, 2011 • Personal Income Tax Rate • 1/1/2011 – from 3% to 5% • 1/1/2015 – from 5% to 3.75% • 1/1/2025 – from 3.75% to 3.25% • Net Operating Loss Carryforward Absorption Suspension • Tax Years Ending after 12/31/2010 and before 12/31/2014 • Carryover period extended by suspension years • Fiscal Year Taxpayers – four year suspension • Final Year Returns – NOL Carryforwards Lost
Illinois — Legislative Action – Cont'd • HB 2955, P.A. 97-0507 signed August 23, 2011 • Technical Corrections Bill • Full or Partial Combination of Holding Companies • Definition – largely intangible receipts • Pro-rata inclusion or other reasonable method, consistently applied • Notable for organizations with multiple Illinois filings – Section 304 (b), (c), or (d).
Illinois – Veto Session Tax Legislation • Two versions – nearly identical (SB 397 and HB 1883). • HB 1883 passed with supermajority in Senate, defeated in House by a vote of 99 to 8, with six House Members voting present • Notable Exclusion – no decoupling from Bonus Depreciation in 2011 • Differences • Earned Income Tax Credit – HB 1883 increased to 10% vs 7.5% • Personal Exemption – HB 1883 allowed personal exemption to be indexed to CPI • Live Theatre Production Credit – HB 1883 capped at $2M vs $1M
Illinois – Veto Session Tax Legislation – Cont’d • Other provisions • Independent Tax Tribunal to hear tax disputes; organized separate and independent from Department of Revenue • NOLs – most recent version allowed 100k absorption for tax years ending on or after 12/31/2012 • Prior versions - full absorption • Fiscal Year Taxpayer Impact • Elective change in apportionment formula for exchanges • Sunset extension for all tax exemptions, credits and deductions scheduled to expire in 2011, 2012 and 2013 for another five years, including R&D tax credit. • Edge Tax Credit for Sears and extension of economic development agreement in Hoffman Estates • Estate Tax Exclusion increases
Illinois – Veto Legislation - Current • HB 1883 Split into two bills • SB 397 – Business Provisions • SB 400 – Individual Provisions • Passed House – 12/12/2011 • Senate Vote - Today
Illinois Click-through Nexus Updates Overview and Developments • HB 3659 - effective 7/1/11 • NY-style click-through provisions without “rebuttable presumption” • Also provided for affiliate nexus for out-of-state sellers with relationship with in-state sellers selling same type of product using same trade name or trademark. • Various Internet retailers announced intention to sever any potential nexus creating relationships with in-state sellers and in fact terminated these relationships following passage of the law.
Illinois Click-through Nexus Updates Efforts to repeal • At least two bills have been introduced repealing or modifying effect of HB3659: • HB3869 (Dave Winters (R), Rockford) • Amends the effective date of the definition change to retailer maintaining business inside the state to end “on the first day of the month to occur not less than 30 days after the effective date of the Amendatory Act.” • Referred to Rules Committee, 10/27/11. • SB1783 (Antonio Munoz (D) Chicago) • Made changes to affiliate nexus in existing statute and declared that “an advertising link or affiliate marketing link is not sufficient to qualify a retailer as a retailer maintaining a place of business in this State.” • Introduced 2/9/11, last action 3/18/11 Re-referred to Assignments.
Illinois Click-through Nexus Updates Performance Marketing Association v. Hamer • United States District Court – Northern District of Illinois (filed 6/1/11)- Complaint for Declaratory Relief • Basis: • Act violates the Commerce Clause. • Act allows IL to impermissibly regulate commerce outside its borders. • Act violates "Internet" Tax Freedom Act. • Relief • Declaration that “definition of retailer maintaining business in Illinois” contained in Act is unconstitutional under Commerce Clause and Quill and violates "Internet" Tax Freedom Act. • Permanent Injunction against enforcement.
Illinois Click-through Updates – Pending Litigation Performance Marketing Association v. Hamer • Circuit Court of Cook County (filed 7/27/11)- Complaint for Declaratory Judgment and Permanent Injunction • Key Allegations • Act affects the livelihood of approximately 9,000 companies in Illinois that have been negatively affected by passage of the law and subsequent cancellation of contracts with online retailers. • Act lacks specificity related to $10,000 in four calendar quarters provision that would limit such revenue to Illinois connected transactions. • Act discriminates against Internet commerce. • Use tax sought to be collected by Act is already due from IL businesses and residents and there is a mechanism in place for reporting (ST-1, ST-44, IL 1040).
Illinois Click-through Updates – Pending Litigation Performance Marketing Association v. Hamer • Circuit Court of Cook County (filed 7/27/11)- Complaint for Declaratory Judgment and Permanent Injunction • Basis: • Act violates the Commerce Clause • Act allows IL to impermissibly regulate commerce outside its borders • Act violates "Internet" Tax Freedom Act • Relief • Declaration that “definition of retailer maintaining business in Illinois” contained in Act is unconstitutional under Commerce Clause and Quill and violates "Internet" Tax Freedom Act • Permanent Injunction against enforcement
Taxability of Computers, Software, and Related Systems – Illinois • Access to Online Database is Not Taxable if No Transfer of Software and/or TPP • ST 11-0052 GIL, Ill. Dept. of Rev. 6/30/11. • Issue: Whether access to an online database of information is taxable. • Ruling : Service is not taxable. • Digital Signatures Generally Not Taxable; Related Software May Be Taxable • ST 11-0015 GIL, Ill. Dept. of Rev. 3/29/11. • Issue: Whether a digital signature or identification service is taxable. • Ruling: • Service not considered "computer software" and therefore is not subject to tax. • However, any software used to create, encrypt, decrypt or read a digital signature is considered to be software and may be taxable.
Illinois Home Rule Updates – Pending Litigation Regional Transportation Authority v. City of Kankakee et, al. • Circuit Court of Cook County (filed 8/23/11) • Key Allegations • Localities distributing local sales tax revenue to companies sourcing sales to sham offices • Companies set up structure to avoid paying locally imposed taxes, including higher cook county rate • Complaint seeks damages to compensate for loss of tax revenue due to municipalities unlawful conduct • City of Chicago v City of Kankakee et, al. filed same day limited to 1/1/2004 and forward