Global Praxity Tax Conference Amsterdam 2013 - Moss Adams LLP SALT Presentation

2013 Praxity International Tax Conference
Atlanta
Overview of State and Local Tax Issues

Atlanta
AGENDA
• Introduction
• Nexus
• Income Tax
• Sales & Use Tax
• Property Tax
• Credits & Incentives
• Voluntary Disclosure Agreements
• Parting Thoughts

Atlanta
Objectives
• Provide an overview of state and local taxation in the
United States
• Highlight important trends
• Explain planning opportunities and pitfalls
Introduction

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• Corporate income tax –45 states
‐ Exceptions: NV, OH, SD, WA, and WY
• Personal income tax –43 states
‐ Exceptions: AK, FL, NH (int. & div.), NV, SD, TN (int. & div.), WA, TX, and WY
• Sales & use tax –45 states
‐ Exceptions: AK, DE, MT, NH, and OR
• Property tax –50 states
State and Local Taxes At AGlance
Introduction

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State Tax Nexus
What is nexus?
• Nexus is defined as the connection between a taxpayer and a state that is
necessary before a state can impose taxes
Income tax nexus differs from sales tax nexus
• Income tax nexus: limited by Public Law 86‐272
• Sales tax nexus: limited by “Physical Presence” or the “Quill” requirement
Nexus

Atlanta
Nexus For Income Tax: PL 86‐272
Federal law prohibits states and cities from imposing a net income tax on
an out‐of‐state company if the only connection to the state is the solicitation
of sales of tangible personal property
PL 86‐272: General Rule
• Company must be selling Tangible Personal Property
• Sales of services or intangible property not protected
• Only activity in the state is solicitation of sales
• Order for good must be sent outside the state for approval
• Goods are shipped from out‐of‐state
• Only applies to U.S. corporations, but some states honor foreign (non‐U.S.)
corporations
Nexus

Atlanta
Nexus For Sales Tax: Physical Presence
• States generally prohibited from imposing sales tax collection requirements on out‐
of‐state vendors
• U.S. Supreme court has affirmed that a vendor must have physical presence to create
sales tax nexus (Quill Corp. v. North Dakota , 1992)
Examples of Physical Presence
• Deliveries in company owned vehicles or backhauling property
• Occasional visits by sales persons or other personnel
• Trade shows (limitations)
• Fulfillment centers and warehouses
• Servers and/or hosted websites
• Agents and affiliates performing services in the state on
your behalf
• Consigned inventory & vendor managed inventory
• Dealer training
• Warranty work
Nexus

Atlanta
Nexus Trends
Lawmakers are finding new ways to impose state taxes on out‐of‐state
companies that lack traditional physical presence nexus
• Nexus through agency or affiliation
• An out‐of‐state company may be taxable based on its relationship to an in‐
state company
• “Amazon Laws” and click‐through nexus
• Out‐of‐state seller creates sales tax nexus with a state when it enters into
an agreement with a resident of that state, under which the resident
refers buyers via a website link for a commission.
• Adopted in AR, CA, CT, IL, MN, MO, NC, NY, OH, PA, RI, SC (2016), VT
• Many other states are considering
• Federal legislation
• Marketplace Fairness Act of 2013 (“Internet Sales Tax”): Would allow states to
impose sales tax collection requirement on certain remote sellers
• As of this writing, the Act has passed the U.S. Senate and has moved to the
House of Representatives
Nexus

Atlanta
Nexus Trends
Economic Nexus Scorecard
• Factor Presence Nexus
• CA (>$500,000 of receipts)
• CT (>$500,000 of receipts)
• CO (>$500,000 of receipts)
• MI (>$350,000 of receipts)
• OH (>$500,000 of receipts)
• WA (>$250,000 of receipts)
• Deriving receipts or income from in‐
state sources
• IA
• KY
• MN
• NJ
• OR
• WI
Nexus
• Economic nexus
• Income taxes imposed when a
specific dollar amount of sales,
property or payroll
• Some states have more vague
definitions
• Applies to income from services,
royalties, interest, digital goods
• P.L. 86‐272 protects sales of
tangible personal property

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AGENDA
• Objectives
• Nexus
• Income Tax
• Sales & Use Tax
• Property Tax
• Credits & Incentives
• Voluntary Disclosure Agreements
• Parting Thoughts

Atlanta
Business Income/Franchise Tax
46 states plus The District of Columbia impose an income and/or franchise
tax
• Income taxes are imposed on corporations
− Rates generally range from 1% to 12%
• Franchise taxes are imposed on business entities
− Tax base is capital or net worth
− Rates generally range from $1.50‐3.00 per $1,000 net worth
− More than half of the states impose some sort of franchise tax
Filing methods generally include combined, consolidated, and separate
Business Income Tax

Atlanta
Separate reporting
Each business entity with nexus is treated as a separate taxpayer
Combined reporting
• Businesses that are part of a “unitary” group file a combined tax return
• Characteristics of a “unitary” business:
− Contribution & dependency
− Strong centralized management
− Economies of scale/flow of goods
• Intercompany transactions are eliminated
• May include non‐U.S. affiliates owned > 50%
− A non‐US affiliate is typically excluded if 80% or more of its business
activity is outside the U.S
• Trend: More states are requiring combined reporting in order to increase
their tax base
Separate vs. Combined Reporting
Business Income Tax

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Federal Taxable Income Base
+/‐State Modifications
= Apportionable State Income
x Apportionment Percentage
= State Taxable Income
x State Tax Rate
= State Tax Amount
State Taxable Income Formula
Business Income Tax

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Federal income taxes
State income taxes
Depreciation
• Many states disallow Federal “bonus”
depreciation
Expenses paid to related parties
• Includes interest, royalties, management
fees
• Trend: More states are disallowing related‐
party expenses to prevent taxpayers from
shifting income to low‐tax jurisdictions
Common Modifications
Business Income Tax

Atlanta
Apportionment: Basic Principles
What percentage of the company’s income may the
state tax?
• Non‐uniformity: Rules vary from state to state
‐ May result in double taxation or “nowhere sales”
Planning opportunity: Consider state apportionment
rules when locating or expanding your business
Business Income Tax
Total apportionable State Income
x Apportionment Percentage
= Apportioned Business Income

Atlanta
Apportionment Formulas
Traditional 3-Factor Apportionment Formula
In‐state Sales
Total Sales
In‐state Payroll
Total Payroll
In‐state Property
Total Property
3
Trends in apportionment formulas:
• Shift towards single sales factor or multiple‐weighted sales factor
• Decreases tax burden of companies with in‐state property and payroll
Business Income Tax

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Apportionment –Sales Factor
What is included and where is it sourced?
Tangible Personal Property:
• Sales sourced to destination state
• “Throwback rule” in some states: When the seller is not taxable in the
destination state, sales are sourced to the state shipped from
Services:
• Cost of performance method: Sales sourced to state in which
“income producing activity” is performed
• Market sourcing method: Sales sourced to state in which customer
receives the benefit of the service
• Favors in‐state service providers who have out‐of‐state sales.
• Trend: More states are moving to a market‐based rule
• Current market states: AL, CA, GA, IL, MD, MI, MN, NE (eff.
2014), OH, WA, & WI
Business Income Tax

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Residents are taxed on their worldwide
income (including investment income that is
sourced to state of residence). To prevent
double‐taxation, may claim credit for taxes
paid to other states
Nonresidents are taxed on their state‐source
income (wages and apportioned business
income)
Tax rates range from 3.4% ‐ 12.3%
Personal Income Tax
Personal Income Tax

Atlanta
State Sales & Use Tax
45 states plus The District of Columbia impose a general Sales & Use Tax
• Five states do not: Alaska, Delaware, Montana, New Hampshire and Oregon
Average rates range from 4‐10%
Tax is imposed on buyer, but seller is required to collect it
Home Rule vs. Non‐home Rule
Non‐home rule (general rule)
• Usually, states administer and collect all state, city and other local sales taxes
Home rule:
• Certain local governments are authorized to impose and collect their own
sales tax
• Watch out for local filing requirements in: Alabama, Alaska (local only), Arizona,
Colorado, Illinois and Louisiana
Sales & Use Tax

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What is taxable?
In general, all sales of tangible personal property are subject to sales tax
• Exemptions may apply (varies by state)
Other transactions/products may also be subject to sales tax (varies by state):
• Services (42 states), intangibles, computer software, utilities
Common exemptions from sales tax include:
• Sale for resale
• Examples: Food by a restaurant, raw materials by a manufacturer
• Seller must obtain resale certificate
• Casual or Occasional Sales
• Component parts of manufacturing products
• Sales of machinery or equipment
• Essential items (food and medical devices)
Sales Tax ‐Exemptions From Base
Sales & Use Tax

Atlanta
Primary source of revenue for
local governments
Rates generally range from 1‐5%
Tax Base
• Based on FMV, not cost
• Assessed value on specified date (e.g., lien date)
Taxable Property
• All forms of realty: land, personal residences, apartment
buildings, offices, factories, etc.
• Selected types of tangible personal property (varies by state)
• Inventory is generally exempt
• States to watch out for: AK, AR, KY, LA, MA, OK, TX, VA, VT, WV
Property Taxes
Property Taxes

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Credits and Incentives
States provide a variety of credits and incentives to attract businesses to their jurisdiction
Credits and incentives are commonly provided for:
• Creating jobs (especially for disadvantaged employees)
• Investment / targeted economic development in high unemployment areas
• Research & development
• Targeted sectors (e.g., energy, agriculture, manufacturing, and healthcare)
Many states also offer cash grants for certain business activities
• Employment, training and education
• Large or very targeted expansions
Many incentives are negotiable, and must be done in advance of investment
Some incentives are statutory and many be claimed if activity done by eligible company
Certain credits are transferable (may be sold to another business)
Credits & Incentives

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• If your client already has business activity in the United States,
they probably have filing obligations that they do not know about
• Income tax:
• Treaties between the U.S. and foreign governments may not
protect a non‐U.S. company from state taxation
• A non‐U.S. company may have nexus with a state even though it does
not maintain a permanent establishment in that state
• P.L. 86‐272 does not protect non‐U.S. companies
• Other forms of taxation
• Non‐income taxes are generally not subject to treaties
State Taxation of Non‐U.S. Businesses
Voluntary Disclosure

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• Almost all states allow a taxpayer with an exposure for current
and prior period taxes to come forward and pay tax under a
voluntary disclosure agreement
• Most will waive penalties, some will waive interest
• Most will limit the look back period to 3‐6 years
• Most require the taxpayer not be registered with the state or to
have not received notices from the state (some exceptions here)
ever or at least within the last year
• Most require a third party to represent the taxpayer through the
process
• The taxpayer remains anonymous until an agreement is reached
• Careful if your client has collected and not remitted sales tax
State Voluntary Disclosure
Voluntary Disclosure

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• Before your client starts doing business in the United States:
• Consult with a U.S. state & local tax advisor.
• Depending on where they locate their business, they may pay state tax on 0% to over 200%
of their net income.
• If your client is already doing business in the United States:
• They are likely not filing where they need to. They should consider completing a nexus
study & exposure analysis. State auditors are aggressively looking for exposures.
• If selling a product that requires customs or other state inspection, make sure they are filing
sales tax returns. States are vigorously cross referencing activities to locate unregistered
taxpayers selling into their states.
• Most companies are doing something that qualifies for a credit or incentive. Many times the
opportunity to claim these incentives is lost if they do not prequalify for incentive.
• If they have known exposures, consider voluntary disclosure over amnesty.
• Think about a reverse audit of sales & transaction taxes paid if substantial property in US.
• Have an expert review any response to state phishing letters.
Parting Thoughts

Atlanta
Rob O’Neill, Partner
Moss Adams, LLP
State & Local Tax Practice
(503) 478‐2339
rob.oneill@mossadams.com
Bob Reynolds, Partner
Moss Adams, LLP
State & Local Tax Practice
(916) 503‐8138
bob.reynolds@mossadams.com

Atlanta
www.praxity.com

Global Praxity Tax Conference Amsterdam 2013 - Moss Adams LLP SALT Presentation

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