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22nd Annual Health SciencesTax ConferenceA pinch of SALT: what you need to knowDecember 3, 2012
Disclaimer►   Any US tax advice contained herein was not intended or    written to be used, and cannot be used, for the pu...
DisclaimerErnst & Young refers to the global organization of member firms of Ernst & YoungGlobal Limited, each of which is...
Presenters►   David Farren                                    ►   Keith Eisenstein    Health Management Associates        ...
Agenda►   State fiscal overview►   State income and franchise tax developments    ►    Nexus    ►    Combined reporting   ...
State fiscal overview
50-state study: state and local businesstaxes in FY 2010 – FY 2011                                                        ...
One-year growth in state and local businesstaxes, FY 2011  TOTAL STATE BUSINESS TAX                                       ...
Where are we today?►   State and local tax collections are slowly improving    ►    U.S. Census Bureau’s “Quarterly Summar...
States reacted to falling revenue by limitingheadcount and expenditure growth                                             ...
2012 state budget surpluses►   Overall    ►     29 states and the District of Columbia are expecting to close out FY 2012 ...
Budget outlook for FY 2013►   FY 2013 state spending projected to rise by 2.4%*    ►     Indiana, South Carolina, Alaska p...
State income and franchise taxdevelopments
Nexus
Nexus►   Business Activity Tax Simplification Act    ►     H.R. 1439          ►   Would establish a bright-line rule that ...
Economic nexus (adopted since 2007)(all dollars in US)►   Factor presence standards adopted    ►     Multistate Tax Commis...
Economic nexus►   West Virginia    ►     Conagra (WV Sup. Ct.) — in-state presence of trademarked property          does n...
Economic nexus: administrativedevelopments►   Iowa    ►     Jack Daniels Property (Iowa Admin. Hearing Comm.) —          o...
Economic nexus: administrativedevelopments (cont.)►   California (cont.)    ►     FTB Chief Counsel Ruling 2012-03 (cont.)...
Nexus: ownership of limited partnership (LP)interest►   Louisiana    ►     UTELCOM, Inc. (La. App. Ct.) — corporations tha...
Nexus: clinical trials►   Indiana    ►     Indiana Department of State Revenue, Letter of Findings    ►     02-20110552 (J...
Combined reporting
Combined reporting►   District of Columbia    ►     B19-203 (enacted September 14, 2011) — adopts mandatory combined      ...
Combined reporting (cont.)►   New York    ►     Issue date of proposed regulations: August 23, 2012    ►     Impacts: Chan...
Combined reporting (cont.)►   New York combined reporting: key provisions in proposed regulations    ►     Unitary busines...
Combined reporting (cont.)►   New York combined reporting: key provisions in proposed regulations    (cont.)    ►     Prop...
Combined reporting (cont.)►   North Carolina    ►     S.B. 824 (enacted June 20, 2012) — Revenue Secretary must use       ...
Combined reporting (cont.)►   North Carolina (cont.)    ►     H.B. 619 (enacted June 30, 2011) — provides guidance to taxp...
Combined reporting (cont.)►   Wisconsin    ►     A.B. 40 (enacted June 26, 2011) implements the 2011–13 Executive         ...
Tax base
Related-party add-backs►   Indiana    ►     Letter of Findings No. 02-20110459 (September 27, 2012 — a corporation was not...
Related-party add-backs (cont.)►   Virginia    ►     Wendy’s International Inc. (Va. Cir. Ct., City of Richmond) — the    ...
Treatment of alternative state business taxes►   Whether a state will provide a tax credit or require an add-back for the ...
NOLs►   Suspended — California, Illinois, Maine    ►     Legal Ruling 2011-04 (September 23, 2011) — Franchise Tax Board  ...
NOLs (cont.)►   Pennsylvania    ►     2010 and thereafter, cap on NOL is the greater of US$3 million or 20% of          ta...
Federal conformity issues: bonusdepreciation and increased expensing►    Small Business Jobs Act extends bonus depreciatio...
Federal conformity issues (cont.)►   Cancellation of debt income deferral election under IRC § 108(i)    ►     States that...
Federal conformity issues (cont.)►   Mississippi    ►     H.B. 1519 (enacted April 23, 2012)          ►   Mississippi did ...
Allocation and apportionment
Increase the sales factor and move tomarket-based sourcing►   Sales factor changes    ►     Single sales factor (SSF) adop...
MTC apportionment election►   The MTC allows taxpayers to elect to apportion their income in    accordance with the MTC st...
MTC apportionment election (cont.)►   Gillette Co.    ►     On October 2, 2012, the California Court of Appeal issued its ...
MTC apportionment election (cont.)►   Gillette Co. (cont.)    ►     Taxpayers that can benefit from making an MTC election...
California Proposition 39►   Approved by California voters on November 6, 2012    ►     Mandatory SSF with market-based so...
MTC apportionment election►   Michigan    ►     H.B. 4479 (enacted May 25, 2011) —beginning January 1, 2011, taxpayers can...
Other apportionment and allocation matters►   California    ►     General Mills, Inc. (Cal. Ct. App.) — inclusion of gross...
State tax controversy and tax amnestydevelopments
Controversy: burden of proof cases►   Indiana    ►     Rent-A-Center East (Ind. Sup. Ct.) — when the DOR makes a proposed ...
Current tax amnesty programs►   Kentucky    ►     October 1, 2012 through November 30, 2012    ►     Qualified taxpayers w...
Current tax amnesty programs (cont.)►   New Jersey Voluntary Disclosure Initiative    ►     The Lanco (2006) and Praxair (...
Current tax amnesty programs (cont.)New Jersey Voluntary Disclosure Initiative (cont.)Key features                        ...
Other notable developments
Other legislative developments►   Missouri    ►     S.B. 19 (enacted April 26, 2011) — phases-out the franchise tax       ...
Other legislative developments (cont.)►   Pennsylvania    ►     H.B. 761 (enacted July 2, 2012) — key changes          ►  ...
Other judicial developments►   New York    ►     The Metropolitan Commuter Transportation Mobility Tax declared          u...
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A pinch of SALT: what you need to know

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Covering trends in state and local taxes, we'll focus on the impact regarding income and franchise taxes whether from a compliance, controversy or tax planning perspective.

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A pinch of SALT: what you need to know

  1. 1. 22nd Annual Health SciencesTax ConferenceA pinch of SALT: what you need to knowDecember 3, 2012
  2. 2. Disclaimer► Any US tax advice contained herein was not intended or written to be used, and cannot be used, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions.Page 2 A pinch of SALT: what you need to know
  3. 3. DisclaimerErnst & Young refers to the global organization of member firms of Ernst & YoungGlobal Limited, each of which is a separate legal entity. Ernst & Young LLP is a clientserving member firm of Ernst & Young Global Limited operating in the US. For moreinformation about our organization, please visit www.ey.com.This presentation is © 2012 Ernst & Young LLP. All rights reserved. No part of thisdocument may be reproduced, transmitted or otherwise distributed in any form or byany means, electronic or mechanical, including by photocopying, facsimiletransmission, recording, rekeying, or using any information storage and retrievalsystem, without written permission from Ernst & Young LLP. Any reproduction,transmission or distribution of this form or any of the material herein is prohibited andis in violation of US and international law. Ernst & Young LLP expressly disclaimsany liability in connection with use of this presentation or its contents by any thirdparty.Views expressed in this presentation are not necessarily those of Ernst & Young LLP.Page 3 A pinch of SALT: what you need to know
  4. 4. Presenters► David Farren ► Keith Eisenstein Health Management Associates Ernst & Young LLP Naples, FL New York, NY +1 212 773 9052 keith.eisenstein@ey.com ► Sid Silhan Ernst & Young LLP Atlanta, GA +1 404 817 5595 sid.silhan@ey.comPage 4 A pinch of SALT: what you need to know
  5. 5. Agenda► State fiscal overview► State income and franchise tax developments ► Nexus ► Combined reporting ► Tax base ► Allocation and apportionment ► State tax controversy and tax amnesty developments ► Other notable developmentsPage 5 A pinch of SALT: what you need to know
  6. 6. State fiscal overview
  7. 7. 50-state study: state and local businesstaxes in FY 2010 – FY 2011 2011 FY2010 FY2011 % total One-yearBusiness tax (US$b) (US$b) taxes changeBusiness property taxes $248.6 $244.9 38.0% -1.5%Sales taxes on business inputs 123.3 129.7 20.1 5.2Corporate income tax 42.7 46.3 7.2 8.5Unemployment insurance 32.4 41.2 6.4 27.1Business and corporate license 37.0 37.3 5.8 0.9Individual income tax on passthru 33.0 36.3 5.6 10.0Excise taxes 30.5 35.0 5.4 14.9Public utility taxes 28.9 28.8 4.5 -0.3Insurance premiums taxes 16.6 17.2 2.7 3.6Severance taxes 11.3 14.8 2.3 30.9Total business taxes $616.0 $643.9 100.0% 4.5% Note: Figures may not sum due to rounding. Prepared by Ernst & Young’s QUEST practice in conjunction with Council on State Taxation (COST).Page 7 A pinch of SALT: what you need to know
  8. 8. One-year growth in state and local businesstaxes, FY 2011 TOTAL STATE BUSINESS TAX 9.8% Unemployment insurance 27.1% Other business taxes 20.7% Excise taxes 18.0% Individual income 10.0% Corporate income 9.3% General sales 5.7% Insurance premiums 3.7% Corporate & business license 1.3% Public utility -0.6% Property taxes -2.1% TOTAL LOCAL BUSINESS TAX -0.8% General sales 3.4% Other business taxes 0.9% Excise 0.8% Property taxes -1.5% -5% 0% 5% 10% 15% 20% 25% 30%Prepared by Ernst & Young’s QUEST practice in conjunction with Council on State Taxation (COST).Page 8 A pinch of SALT: what you need to know
  9. 9. Where are we today?► State and local tax collections are slowly improving ► U.S. Census Bureau’s “Quarterly Summary of State and Local Government Tax Revenue” (September 25, 2012) ► Q2 2012 tax revenues were up 3.3% from Q2 2011 ► Property and individual income tax showed growth over same quarter in 2011, but corporate income tax and sales/use tax were down from the same quarter in 2011 ► Q2 2012 local property tax collections up 6.2% from Q2 2011► State budget gaps are projected to narrow ► National Governors Association (NGA)/National Association of State Budget Officers (NASBO): “The Fiscal Survey of States” (June 2012) ► 19 states project US$30.7b in budget gaps for FY 2013 (four states have US$3.1b in remaining FY 2012 gaps that must be closed by fiscal year-end) ► 11 states project US$23.3b in budget gaps for FY 2014 ► This compares with US$146.3b=B in budget gaps over FY 2011–12Page 9 A pinch of SALT: what you need to know
  10. 10. States reacted to falling revenue by limitingheadcount and expenditure growth State employment growth over past five recessions 18 1973 1980 1990 2001 2007 16 Cumulative percent change since start of recession 1973 14 12 10 8 1990 6 4 2001 2 1980 0 0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 32 34 36 38 40 42 44 46 48 50 -2 Months since start of recession 2007 -4 Source: U.S. Bureau of Labor Statistics (CES, seasonally adjusted).Page 10 A pinch of SALT: what you need to know
  11. 11. 2012 state budget surpluses► Overall ► 29 states and the District of Columbia are expecting to close out FY 2012 with balances >5% (National Conference of State Legislatures (NCSL)). ► Severance tax states are reporting the largest year-end balances, most >30%. National Council of State Legislatures, Morgan Stanley Smith Barney, Ernst & YoungPage 11 A pinch of SALT: what you need to know
  12. 12. Budget outlook for FY 2013► FY 2013 state spending projected to rise by 2.4%* ► Indiana, South Carolina, Alaska projecting 9%+ spending increase ► Six states project spending cuts (AL, DE, ME, MD, TX, WY)► FY 2013 state revenue projected to rise by 3.7%* ► 44 states project year-over-year revenue growth ► California projecting 10.1% revenue growth ► New Jersey projecting 8.0% revenue growth► Largest state budget challenge is rising Medicaid costs ► Medicaid enrollment and cost levels are a major issue for 2013, as spending related to federal health care reforms comes online ► State expansions required by federal health reform will create stress in FY 2013 budgets► For the first time since before the 2008 economic downturn, no state is projecting a deficit by the end of FY 2013 * Source: NCSL.Page 12 A pinch of SALT: what you need to know
  13. 13. State income and franchise taxdevelopments
  14. 14. Nexus
  15. 15. Nexus► Business Activity Tax Simplification Act ► H.R. 1439 ► Would establish a bright-line rule that prohibits state taxation of an out-of-state entity unless such entity has a physical presence in the taxing state ► Expands the prohibition against state taxation of interstate commerce to include: ► Taxation of out-of-state sales transactions involving all forms of property, including intangible personal property and services ► All other business activity taxes in addition to net income taxes ► Exempts from state taxation persons who enter a state merely to furnish information to customers and affiliates, to cover news or other events or to gather information in the state ► Sets forth jurisdictional standards for states in imposing, assessing or collecting a net income tax or other business activity tax on interstate activities ► Sets forth rule for computing the net income tax or other business activity tax liability of an affiliated groupPage 15 A pinch of SALT: what you need to know
  16. 16. Economic nexus (adopted since 2007)(all dollars in US)► Factor presence standards adopted ► Multistate Tax Commission (MTC) model rule (October 2002) ($50,000 property, $50,000 payroll, $500,000 sales or 25% of property, payroll and sales)► Bright-line sales factor presence standards adopted ► California — $500,000 effective January 1, 2011 ► Colorado — $500,000 effective April 30, 2010 ► Michigan — $350,000 effective January 1, 2008 ► New York — $1 million (for credit card banks only) effective January 1, 2008 ► New York City — $1 million (for credit card banks) effective January 1, 2011 ► Washington — $250,000 effective June 1, 2010► Purposeful direction of business to the state/doing business in the state ► Connecticut — effective January 1, 2010* ► New Hampshire — effective July 1, 2007 ► Oregon — effective May 8, 2008 ► Wisconsin — effective January 1, 2009 *Does not apply to foreign corporations unless they have effectively connected income — effective January 1, 2011Page 16 A pinch of SALT: what you need to know
  17. 17. Economic nexus► West Virginia ► Conagra (WV Sup. Ct.) — in-state presence of trademarked property does not create nexus for foreign licensor that has no physical presence in the state and did not sell or distribute trademarked products or provide services within the state. ► Imposition of tax satisfies neither “purposeful direction” under the Due Process Clause nor “significant economic presence” under the Commerce Clause ► Decision begins to set boundary on reach of “significant economic presence” standard ► Concurring judge would have overruled MBNA► Oklahoma ► Scioto (Okla. Sup. Ct.) — amounts an out-of-state insurance company received for use of its intellectual property by fast-food chain operating in state are not subject to Oklahoma’s corporate income tax because the company did not have nexus with Oklahoma. ► Imposition of tax offends due processPage 17 A pinch of SALT: what you need to know
  18. 18. Economic nexus: administrativedevelopments► Iowa ► Jack Daniels Property (Iowa Admin. Hearing Comm.) — out-of-state intangible holding companies that have no property, employees, affiliates or retail operations in Iowa are liable for corporate income tax on royalty income from Iowa sales made by third-party retailers. ► Administrative Law Judge dismissed the fact that the company was set up for non-tax purposes► California ► Franchise Tax Board (FTB) Chief Counsel Ruling 2012–03 ► Addresses impact of economic nexus and throwback for sales of tangible personal property (TPP) ► Holdings include: ► No throwback of foreign sales to CA if TPP sales to that jurisdiction > US$500kPage 18 A pinch of SALT: what you need to know
  19. 19. Economic nexus: administrativedevelopments (cont.)► California (cont.) ► FTB Chief Counsel Ruling 2012-03 (cont.) ► According to California Revenue and Taxation Code Section 25122 and regulations thereunder, taxpayer would be taxable in that foreign jurisdiction ► No PL 86-272 protection available for foreign sales ► No throwback to CA of sales to a specific state if TPP sales to the state > US$500k ► An affiliate/member of the taxpayer’s combined reporting group has constitutional nexus in that statePage 19 A pinch of SALT: what you need to know
  20. 20. Nexus: ownership of limited partnership (LP)interest► Louisiana ► UTELCOM, Inc. (La. App. Ct.) — corporations that were limited partners in LPs did not have franchise tax nexus when their only contact with Louisiana was ownership of limited partnership interests in a LP that conducted business in Louisiana.► New Jersey ► BIS LP, Inc. (NJ Superior Ct.) (unpublished) — limited partnership interest in a partnership doing business in the state does not by itself create corporation business tax nexus for a foreign corporate limited partner.Page 20 A pinch of SALT: what you need to know
  21. 21. Nexus: clinical trials► Indiana ► Indiana Department of State Revenue, Letter of Findings ► 02-20110552 (July 25, 2012) ► The Department agreed that Taxpayer (an un-named pharmaceutical company) did not have to throw back sales into states where it could demonstrate it had nexus due to the supervision of clinical trials in those states. ► Taxpayer argued it had nexus in those states where it employed individuals to supervise independent investigators/physicians. ► The Department sent the case back to audit to allow Taxpayer to demonstrate the existence, and its supervision of, clinical trials in those states in which sales were thrown back to Indiana.Page 21 A pinch of SALT: what you need to know
  22. 22. Combined reporting
  23. 23. Combined reporting► District of Columbia ► B19-203 (enacted September 14, 2011) — adopts mandatory combined reporting ► Effective for taxable years beginning after December 31, 2010 ► Default is water’s-edge, with a worldwide election ► No sharing of net operating losses (NOLs) or credits among members of the group ► Regulation § 56, et seq. adopted September 14, 2012 addresses a variety of provisions, including: ► Determination of taxable income or loss of the combined group ► Apportionment (DC adopts the Joyce rule) issues ► Guidance on including unincorporated business entities/partnerships in the combined report ► The financial accounting deductionPage 23 A pinch of SALT: what you need to know
  24. 24. Combined reporting (cont.)► New York ► Issue date of proposed regulations: August 23, 2012 ► Impacts: Changes will impact various corporate franchise tax regulations and codify the New York Department of Taxation and Finance’s interpretation of combined reporting requirements ► Purpose: To provide additional guidance regarding the January 2007 changes to combined reporting provisions ► Incorporates: Updated regulations for the Department’s previously issued Technical Services Memorandum (TSB-M-08(2)C) issued on March 3, 2008Page 24 A pinch of SALT: what you need to know
  25. 25. Combined reporting (cont.)► New York combined reporting: key provisions in proposed regulations ► Unitary business requirement — Proposed Reg. Sec. 6-2.1(a) ► Combined reporting is now required when three requirements are satisfied: ► Unitary business — the group of corporations is engaged in a unitary business ► Capital stock requirement — the capital stock requirements are met ► Substantial inter-company transaction (SIT) — the corporations meet the SIT requirements ► Exception: combined reporting may still be required “under certain circumstances” when the group of corporations is engaged in a unitary business. ► Caveat: the phrase “under certain circumstances” has not been defined and provision is unclear. See Proposed Reg. Sec. 6-2.3(d).Page 25 A pinch of SALT: what you need to know
  26. 26. Combined reporting (cont.)► New York combined reporting: key provisions in proposed regulations (cont.) ► Proposed regulations update expansion of the definition of SIT ► Two additional categories of transactions can now establish SIT: ► Incurring expenses that benefit, directly or indirectly, one or more relating corporations ► Transferring assets, including assets such as accounts receivable, patents or trademarks, from one or more related corporations (Proposed Reg. Sec. 6-2.3). ► Additional considerations for SIT: ► Dividends are not considered for SIT purposes ► Exception: dividends will be considered for purposes of the asset transfer test ► Interest is considered including interest on loans that constitutes subsidiary capital (change in Dept. policy) ► Exclusions: proposed regulations expand service functions not considered for SIT test by including centralized payroll and inter-corporate costs allocation functions.Page 26 A pinch of SALT: what you need to know
  27. 27. Combined reporting (cont.)► North Carolina ► S.B. 824 (enacted June 20, 2012) — Revenue Secretary must use expedited rule-making process to describe circumstances under which the adjustment of a taxpayer’s net income or a combined income tax return will be required. ► Until a final rule is approved, the Secretary is prohibited from making such adjustment or requiring a combined return. ► But, the Secretary and taxpayers can agree to voluntary re-determinations in the absence of a final rule. ► Delhaize (N.C. App. Ct.) — The Department of Revenue’s (DOR) use of forced combination to more accurately reflect a company’s true earnings in North Carolina did not violate procedural due process. ► DOR’s imposition of a 25% penalty does not violate due process.Page 27 A pinch of SALT: what you need to know
  28. 28. Combined reporting (cont.)► North Carolina (cont.) ► H.B. 619 (enacted June 30, 2011) — provides guidance to taxpayers as to when the DOR will require taxpayers to either: ► File a combined return or ► Add back, eliminate or otherwise adjust income reported to the state due to inter-company transactions ► Generally effective January 1, 2012► Rhode Island ► Pro forma combined report required for 2011 and 2012 ► At a minimum, the combined report must include the following: ► The difference in tax owed as a result of: (1) filing a combined report versus separate entity returns, and (2) using a single sales factor formula versus an equally weighted three-factor formula ► If any individual member does not have nexus with the state, taxpayer must compute its sales factor comparing Joyce and Finnigan ► Volume of sales/taxable income in the state and worldwidePage 28 A pinch of SALT: what you need to know
  29. 29. Combined reporting (cont.)► Wisconsin ► A.B. 40 (enacted June 26, 2011) implements the 2011–13 Executive Budget Bill. Key tax changes will: ► Amend combined reporting provisions to allow combined groups, effective for taxable years beginning after December 31, 2011, to share net business loss carryforwards incurred by group members before January 1, 2009, with certain limitations ► Unused losses can be carried forward for up to 19 years ► Prohibit the Department of Revenue from disregarding a taxpayer’s election to include a controlled business in the combined group, effective retroactively to taxable years beginning on or after January 1, 2009 ► Establish a qualified production activities income tax credit, the amount of which would increase from 1.875% in 2012 up to 7.5% for 2015 and thereafterPage 29 A pinch of SALT: what you need to know
  30. 30. Tax base
  31. 31. Related-party add-backs► Indiana ► Letter of Findings No. 02-20110459 (September 27, 2012 — a corporation was not required to add back intangible expense paid, accrued or incurred by a related LLC taxed as a partnership, because the definition of “affiliated group” does not include such LLCs.► New Jersey ► Add-back exception provided for intangible expenses paid to a related member in a foreign nation that has a tax treaty with the US ► TAM 2011-22 (December 7, 2011) — when a domestic affiliate pays royalties or expenses to a foreign affiliate or parent for use of an intangible in New Jersey, the Division of Taxation will examine the transaction to ensure that the domestic entity reports an accurate amount of expenses and deductions ► Analysis is similar to arm’s-length pricing requirement in Internal Revenue Code (IRC) § 482 ► Division of Taxation can make adjustments if the domestic taxpayer’s entire net income is not fairly reflectedPage 31 A pinch of SALT: what you need to know
  32. 32. Related-party add-backs (cont.)► Virginia ► Wendy’s International Inc. (Va. Cir. Ct., City of Richmond) — the restaurant chain parent is entitled to a refund of income tax paid on amounts of royalties deducted on its federal return that were added back to the Virginia return because the amounts qualified for the conduit exception to related-party add-back rule.Page 32 A pinch of SALT: what you need to know
  33. 33. Treatment of alternative state business taxes► Whether a state will provide a tax credit or require an add-back for the Texas margin tax, Ohio commercial activity tax (CAT) or other alternative tax depends on if the tax is based on net income. ► California — margin tax: depends on the method used to compute the tax ► Georgia — margin tax: not considered an income tax ► Kansas — margin tax: is a tax based on net income ► Minnesota — CAT and margin tax: neither is based on net income ► South Carolina — business income tax portion of the Michigan business tax (MBT), the margin tax and CAT: neither allowed as a deduction, but modified gross receipts tax portion of the MBT and the Ohio CAT can be deducted ► Virginia — margin tax: not based on net income ► Wisconsin — MBT and margin tax: may qualify as net income tax if certain conditions are met ► ConsistencyPage 33 A pinch of SALT: what you need to know
  34. 34. NOLs► Suspended — California, Illinois, Maine ► Legal Ruling 2011-04 (September 23, 2011) — Franchise Tax Board (FTB) takes the position that only an NOL that could have been used to offset taxable income generated in the suspension year is allowed an extension of the carryover period.► Usable amount limited — Colorado, Illinois, New Hampshire ► Illinois amended the net loss deduction suspension to allow a deduction not to exceed US$100,000 for a taxable year ending on or after December 31, 2012 and prior to December 31, 2014. ► New Hampshire increased the cap from US$1m to US$10m.► Carryback eliminated — Indiana► Carryforward extended — Arizona (up 20 years, from five years)► NOLs eliminated — MBT NOLs eliminated with adoption of corporate income tax (CIT)Page 34 A pinch of SALT: what you need to know
  35. 35. NOLs (cont.)► Pennsylvania ► 2010 and thereafter, cap on NOL is the greater of US$3 million or 20% of taxable income► North Carolina (NC) ► Historically, taxpayers required to reduce NC-apportioned net economic loss (NEL) in year generated by amount of all “income not taxable” ► Under the DOR’s revised interpretation of law, income properly deducted either by virtue of the IRC or NC statute is included as “allowable deductions” and does not reduce the NEL in the year generated ► Income deducted under IRC or NC statute still required to offset NEL carryforward in year(s) following initial generation before the NEL can be deducted on a returnPage 35 A pinch of SALT: what you need to know
  36. 36. Federal conformity issues: bonusdepreciation and increased expensing► Small Business Jobs Act extends bonus depreciation through 2010► Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 allows 100% expensing for capital investments through 2011, 50% bonus depreciation in 2012 States decoupling from 2010 bonus depreciation and increased expense limit Arizona Hawaii Maryland New York* South Carolina* Arkansas Idaho* Massachusetts* North Carolina* Tennessee* California Illinois*^ Michigan* Ohio Texas Connecticut* Indiana Minnesota Oregon Vermont* District of Iowa* Mississippi* Pennsylvania*^ Virginia* Columbia Florida Kentucky New Hampshire Rhode Island Wisconsin Georgia Maine New Jersey*Decouple from IRC § 168 but not IRC § 179 (some states may only conform to the IRC§ 179 increase under the Hiring Incentive to RestoreEmployment (HIRE )Act part^IL and PA conform to the 100% bonus but not to the 50% bonusPage 36 A pinch of SALT: what you need to know
  37. 37. Federal conformity issues (cont.)► Cancellation of debt income deferral election under IRC § 108(i) ► States that decoupled or do not conform due to IRC conformity date► Production deduction (IRC § 199) ► States that decoupled or do not conform due to IRC conformity date► Alabama ► GKN Westland Aerospace (Ala. Dept. of Rev.) — manufacturer that generated a § 199 production deduction but was not allowed to claim it on its federal return because it incurred a consolidated NOL was allowed to claim it on its separate-entity-filed Alabama return.► Virginia ► PD 11-181 (November 1, 2011) — taxpayers that joined in the filing of a federal consolidated return but filed on a separate-company basis in Virginia may claim a Section 199 deduction for Virginia only, despite being ineligible for federal tax purposes. ► H.B. 1153 (enacted March 22, 2012) — allows subtraction of the full amount of the IRC § 199 domestic production activities deduction, effective for taxable years beginning on and after January 1, 2013 ► For tax years 2010–12, the § 199 deduction is limited to two-thirds of the amount of the federal deductionPage 37 A pinch of SALT: what you need to know
  38. 38. Federal conformity issues (cont.)► Mississippi ► H.B. 1519 (enacted April 23, 2012) ► Mississippi did not conform to federal tax-free rules for spin-offs. ► The new law provides that the distributing corporation will not recognize gain from the distribution of stock or securities of a controlled corporation if the distribution is a part of a transaction qualifying for tax-free treatment under IRC § 355 or § 368(a)(1)(D), or it is pursuant to an overall plan to facilitate an ultimate distribution that qualifies for tax-free treatment under §§ 355 or 368(a)(1)(D).Page 38 A pinch of SALT: what you need to know
  39. 39. Allocation and apportionment
  40. 40. Increase the sales factor and move tomarket-based sourcing► Sales factor changes ► Single sales factor (SSF) adopted: Michigan (part of the CIT), Pennsylvania (2013), City of Philadelphia ► SSF being phased-in: Minnesota, New York City, New Jersey, Utah ► SSF (elective): Arizona, California (initiative would repeal SSF election; impact of Gillette decision) ► SSF-specific industry or as an incentive: Florida, Louisiana, Virginia ► Double-weighted sales factor increased: Alabama, District of Columbia► Market-based sourcing adopted ► Alabama ► Arizona (a phased-in election for multistate service providers) ► California (tied to SSF) ► NebraskaPage 40 A pinch of SALT: what you need to know
  41. 41. MTC apportionment election► The MTC allows taxpayers to elect to apportion their income in accordance with the MTC standard three-factor formula or in accordance with the state’s statutes. ► California ► S.B. 1015 (enacted June 27, 2012) — repeals all provisions related to the MTC, effective immediately ► California no longer “sovereignty member” of the MTC ► Not approved by two-thirds vote of either house — Prop 26 problem? ► Doctrine of election — Legislative Counsel’s Digest — Legislature “intended” that any election must be made on an originally filed return ► Gillette Co. (Cal. App. Ct.) — the 1993 law change mandating the double- weighted sales factor be used did not repeal the MTC election and, therefore, taxpayers were entitled to make the MTC election. ► The MTC is a valid compact that California as a signatory state is bound by until the state withdraws from the MTC.Page 41 A pinch of SALT: what you need to know
  42. 42. MTC apportionment election (cont.)► Gillette Co. ► On October 2, 2012, the California Court of Appeal issued its new opinion. ► The Court held taxpayers were entitled to elect to use the MTC standard three- factor apportionment formula instead of the state-mandated double-weighted sales factor apportionment formula. ► Further, the MTC is a valid compact that California as a signatory state is bound by, including the apportionment election provision, until the state withdraws from the MTC and repeals the apportionment election provision.► Implications ► CA withdrew from the MTC effective June 27, 2012 ► Gillette has been remanded to the Superior Court ► Issue exists whether the MTC election can be made on a refund claim ► A final determination on Gillette is likely a long way offPage 42 A pinch of SALT: what you need to know
  43. 43. MTC apportionment election (cont.)► Gillette Co. (cont.) ► Taxpayers that can benefit from making an MTC election should consider filing refund claims. ► However, although election may result in a taxpayer being allowed to use the three-factor formula with a single-weighted sales factor, the election may carry other consequences with it. ► For example, a taxpayer using a special industry apportionment formula (e.g., broadcasting, transportation companies) in California may not be eligible to use the MTC election.Page 43 A pinch of SALT: what you need to know
  44. 44. California Proposition 39► Approved by California voters on November 6, 2012 ► Mandatory SSF with market-based sourcing, effective January 1, 2013 ► Applies to all apportioning trades or business that are not predominantly engaged in “banking or financial business activity” ► Apportionment in prior years ► Pre-2011 state used a double-weighted sales factor ► 2011–12 taxpayers can elect SSF (with market sourcing) or three-factor double-weighted sales factor apportionment formula (with costs-of-performance sourcing) ► Pre-2012 taxpayers could elect to use the MTC equally weighted three-factor formula ► MTC election for 2012 and forward will depend on whether legislation repealing the MTC was passed within the standards set forth in Prop. 26 ► Estimated cost to business of mandatory single-sales-factor apportionment = US$+1b/yr starting in 2013–14Page 44 A pinch of SALT: what you need to know
  45. 45. MTC apportionment election► Michigan ► H.B. 4479 (enacted May 25, 2011) —beginning January 1, 2011, taxpayers cannot apportion/allocate income in accordance with the MTC, but rather must use the method provided by the Michigan Business Tax (MBT) and CIT. ► Litigation (IBM) is currently before the Court of Appeals on whether the election is allowed under the MBT.► Oregon ► ORS 314.606 specifically provides that when the MTC provisions are inconsistent with the Uniform Division of Income for Tax Purposes Act, the Oregon statutory provisions “shall control.” ► Litigation (HealthNet) is currently before the Tax Court.► Texas ► Hearing No. 106,508 (Tex. Comp. of Pub. Accts.) — taxpayers cannot elect to use the MTC three-factor formula instead of the single-sales factor.Page 45 A pinch of SALT: what you need to know
  46. 46. Other apportionment and allocation matters► California ► General Mills, Inc. (Cal. Ct. App.) — inclusion of gross receipts from hedging activities in the apportionment formula does not fairly represent the manufacturer’s business activity in California, thus allowing the FTB to use an alternative apportionment formula.► Florida ► H.B. 142 (enacted May 31, 2011) — certain taxpayers that make qualified capital expenditures of at least US$250 million can elect to use a single- sales-factor apportionment formula.► Mississippi ► S.B. 3097 (enacted April 25, 2011) — receipts for sales to a distribution facility for certain pharmaceutical products by certain major suppliers are not included in the Mississippi apportionment factors for purposes of determining franchise tax.Page 46 A pinch of SALT: what you need to know
  47. 47. State tax controversy and tax amnestydevelopments
  48. 48. Controversy: burden of proof cases► Indiana ► Rent-A-Center East (Ind. Sup. Ct.) — when the DOR makes a proposed assessment of tax liability based upon a reasonable belief that a person has not reported the proper amount of tax due, such assessment constitutes prima facie evidence that its claim for unpaid tax is valid.► Mississippi ► Equifax Credit Information Services (Miss. App. Ct.) — a lower court, in considering the taxpayers’ challenge to the assessment, applied the wrong standard of review, and by doing so effectively switched the burden of proof from the DOR to the taxpayers.► South Carolina ► CarMax (S.C. Ct. App.) — a taxpayer did not bear the burden of proving that an alternate apportionment method proposed by the DOR was not reasonable, and the DOR was required to establish that its proposed method was “not only appropriate, but more appropriate than any competing methods.”Page 48 A pinch of SALT: what you need to know
  49. 49. Current tax amnesty programs► Kentucky ► October 1, 2012 through November 30, 2012 ► Qualified taxpayers will receive waiver of all penalties and waiver of 50% of interest due► Maine ► October 1, 2012 through November 30, 2012 ► For use tax only ► All penalties and interest waived, payment plans available► Rhode Island ► September 2, 2012 through November 15, 2012 ► Qualified taxpayers will receive waiver of all penalties and waiver of 25% of interest duePage 49 A pinch of SALT: what you need to know
  50. 50. Current tax amnesty programs (cont.)► New Jersey Voluntary Disclosure Initiative ► The Lanco (2006) and Praxair (2009) cases have upheld New Jersey’s economic nexus provisions, introduced with the addition of an example to the regulations in 1996 ► New Jersey recently announced the Intangible Asset Nexus Initiative, running from September 15, 2012 to January 15, 2013 ► For companies that ► Own intangible assets ► Derive income from the use of those assets in New Jersey ► Specific requirements in addition to standard Voluntary Disclosure Agreement (VDA) procedures ► Look back limited to later of period after December 31, 2003 or date business commenced (the Division has stated they will look back to 1996 outside of VDA) ► All required returns must be filed and all payments submitted within 90 days of execution of VDA ► Taxpayer must pay interest and amnesty penalty within 30 days of assessment ► All returns subject to routine audit with respect to issues not covered by VDAPage 50 A pinch of SALT: what you need to know
  51. 51. Current tax amnesty programs (cont.)New Jersey Voluntary Disclosure Initiative (cont.)Key features Implications► All penalties waived, except for 5% amnesty ► Taxpayer-friendly terms when compared to penalty for returns due prior to February 2009 alternative 35% penalties► Throw-out relief in form of averaging a throw- ► NJ has stated that it will use discretion and is out receipts fraction with non-throw-out willing to consider proposals for settlement receipts fraction will be considered ► Proposals should be included in initial contact ► Settlement will be binding and if no settlement reached, Division will hold for future determination► Operating companies that pay royalties to ► Operating companies may submit amended intangible holding companies participating in returns, subject to the statute of limitations, in program likely added back royalties for NJ order to claim an add-back exception for entire net income purposes royalties paid► Division willing to entertain proposals for ► Proposals may be submitted in the same manner intangible holding companies in place prior to and the same treatment is anticipated 12/31/03 that were unwound prior to 12/31/03Page 51 A pinch of SALT: what you need to know
  52. 52. Other notable developments
  53. 53. Other legislative developments► Missouri ► S.B. 19 (enacted April 26, 2011) — phases-out the franchise tax beginning in tax year 2012, with full phase-out by 2016► New Jersey ► Research and Development Credit Limit Elimination ► Beginning January 1, 2012, New Jersey has eliminated the limit on the research and development (R&D) credit ► The R&D credit may be used to eliminate corporation business tax liability (subject to the statutory minimum) ► Unused R&D credits may be carried forward for up to seven yearsPage 53 A pinch of SALT: what you need to know
  54. 54. Other legislative developments (cont.)► Pennsylvania ► H.B. 761 (enacted July 2, 2012) — key changes ► Time period for reporting changes to federal income increased to six months (from 30 days) ► Eliminate the December 31, 2015 sunset of the R&D tax credit ► Capital Stock and Franchise Tax expires after December 31, 2013► North Carolina ► H.B. 200 (enacted June 15, 2011) — exclusion of reserves for amortization of intangible assets from the capital base in determining the taxpayer’s franchise tax liability ► Applicable to tax years beginning on or after January 1, 2007► Texas ► Comptroller of Public Accounts revised its policy to allow taxpayer to change or elect to take the cost of goods sold or compensation deduction on an amended long-form franchise tax reportPage 54 A pinch of SALT: what you need to know
  55. 55. Other judicial developments► New York ► The Metropolitan Commuter Transportation Mobility Tax declared unconstitutional — Mangano v. Silver (N.Y. Sup. Ct., Nassau County) ► Nassau County Supreme Court (trial level) declared that the tax was unconstitutionally enacted ► New York State Department of Taxation and Finance has issued guidance concerning protective refund claims ► The deadline for filing a protective refund claim for the first period at issue was November 2, 2012 (subsequently extended to November 14) for employers and is April 30, 2013 for self-employed individuals ► Protective refund claims may still be filed for all periods that are still within the statute of limitations ► Three ways to file: ► Login through existing Online Service account ► Complete electronic form available on Department’s website ► Call +1 518 485 2392Page 55 A pinch of SALT: what you need to know
  56. 56. Questions?

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