This document provides an agenda and summary of updates related to state and local tax laws. It discusses changes and developments in Oregon, California, Washington, Texas, and national state tax trends. Specific topics covered include changes to Oregon's corporate tax rates, personal exemption credits, IC-DISC tax regime, and new legislation on small business taxation. California updates include changes to its enterprise zone program and new partial sales tax exemptions for manufacturing and R&D.

1. State and Local Tax
Updates
Presenters:
Rob O’Neill, CPA – Partner
Dan Lapour, J.D. – Senior Manager
1

2. The material appearing in this presentation is for informational purposes
only and should not be construed as advice of any kind, including, without
limitation, legal, accounting, or investment advice. This information is not
intended to create, and receipt does not constitute, a legal relationship,
including, but not limited to, an accountant-client relationship. Although
this information may have been prepared by professionals, it should not be
used as a substitute for professional services. If legal, accounting,
investment, or other professional advice is required, the services of a
professional should be sought.
2

3. AGENDA
•
•
•
•
•
•
•
Oregon
California
Washington
Texas
National State Tax Trends
Voluntary Disclosure Agreements
Parting Thoughts
3

4. OREGON UPDATE
4

5. OREGON REGULAR
LEGISLATIVE SESSION
• A little bit of a no tax news session
• A few bills passed that impacted business &
individual taxation
• What didn’t pass is more interesting
o
o
o
o
o
No apportionment bill to adopt market sourcing
No PERS reform
No significant tax increases
No BETC or other tax credit overhaul bill
No action taken on minimum tax
• Special session was called to deal with PERS, school
funding and tax reform
5

6. TAX HAVEN LEGISLATION
- HB 2460
•
•
Signed into law August 1, 2013; Effective January 1, 2014
To determine Oregon taxable income, income/loss from a member of a
unitary group is included if it is incorporated in one of the following
“tax haven” jurisdictions:
o Andorra, Anguilla, Antigua and Barbuda, Aruba, the Bahamas, Bahrain,
Barbados, Belize, Bermuda, the British Virgin Islands, the Cayman Islands, the
Cook Islands, Cyprus, Dominica, Gibraltar, Grenada, Guernsey-Sark-Alderney, the
Isle of Man, Jersey, Liberia, Liechtenstein, Luxembourg, Malta, the Marshall
Islands, Mauritius, Monaco, Montserrat, Nauru, the Netherlands, Antilles, Niue,
Samoa, San Marino, Seychelles, St. Kitts and Nevis, St. Lucia, St. Vincent and the
Grenadines, the Turks and Caicos Islands, the U.S. Virgin Islands and Vanuatu.
•
•
•
•
Instructs DOR to make rules to determine income/loss for a corporation
that is a member of a unitary group and not otherwise required to file a
consolidated federal return
Interesting that Oregon would include income of foreign businesses
when it is a water’s edge state
Other states such as Montana, Alaska, West Virginia and District of
Columbia have also adopted similar laws
Watch out if you have a foreign operating subsidiary or captive
6

7. OREGON NEW MARKETS TAX
CREDIT (NMTC)
• HB 2763
• Amount of Qualified Equity Investment (QEI) increased
from $4 million to $8 million
• This program piggyback’s off the federal NMTC program
• NMTC can now be applied to Oregon Insurance Excise
Tax liability of foreign insurance companies without
triggering the retaliatory tax
• For QEI made after January 1, 2014, each annual credit
may be carried forward for 5 years
• Starting to see some companies using OR NMTC to
finance energy projects
7

8. SPECIAL SESSION 2013
– HB 3601
• Passed October 2, 2013 as part of the “grand
bargain” during the special session
• Effective date of bill is January 1, 2014
• Bill applies to various tax years depending on
specific provisions
• Makes significant personal and corporate tax
changes
8

9. THE GRAND BARGAIN - HB 3601
Corporate Tax Rate Increase
• Applies to tax years beginning on or after 1/1/13
o 6.6% of the first $1 million of Oregon apportioned income
(previously $10 million)
o 7.6% of Oregon apportioned income thereafter
Personal Exemption Credit Limited
• Not applicable to High Income Tax Payers for tax years
beginning 1/1/13
• Eliminated for joint return filers, surviving spouses, and
heads of households when gross income exceeds
$200,000
• Eliminated for single filers, or joint filers filing separate
returns when income exceeds $100,000
9

10. HB 3601: IC-DISC TAX REGIME
• IC-DISCs previously were taxed in the same manner as any
other corporations in Oregon, however transactions
between related parties where not respected (eliminated)
resulting in an add back to the commission paying entity
• New Law Provides Special Taxation of IC-DISCs:
o IC-DISCs formed on or before January 1, 2014 are exempt from the
corporate minimum tax (not the case before);
o A 2.5% tax is imposed on any commission received by an IC-DISC
(previously taxed at regular rates);
o A deduction is allowed for commission payments made to an ICDISC formed on or before January 1, 2014 (previously eliminated);
o A subtraction from federal taxable income is allowed for the
amount of any dividend received from an IC-DISC (no change
here); and
o IC-DISCs formed after January 1, 2014 apparently taxed under old
law
10

11. HB 3601:
SMALL BUSINESS TAX CUT
• For tax years beginning on or after January 1, 2015, a
marginal tax rate structure is used for taxpayers
receiving non-passive flow-through income from SCorps, partnerships and LLCs
• To qualify:
1.
2.
3.
The taxpayer must materially participate in the day-to-day
operations of the trade or business;
The entity must employ at least one person who is not a
owner, member or limited partner; and
The employee(s) in (2) must perform 1,200 aggregate
hours of work in Oregon. For this purpose, only the hours
worked by employees working at least 30 hours in any
given week are aggregated
11

12. HB 3601:
SMALL BUSINESS TAX CUT, CONT’D
If the taxpayer meets the requirements, then nonpassive flow-through income from the S-Corp,
partnership, or LLC is taxed at the following rates:
Income greater
than:
But not greater
than:
Tax rate:
---
$250,000
7%
$250,000
$500,000
7.2%
$500,000
$1 million
7.6%
$1 million
$2.5 million
8%
$2.5 million
$5 million
9%
$5 million
---
9.9%
12

13. HB 3601:
SMALL BUSINESS TAX CUT, CONT’D
• A taxpayer may elect to be taxed at the normal rates,
but the election is irrevocable and must be made on
their original return
• A taxpayer who used the marginal rates may not join
in the filing of composite return
• It is unclear whether or not the filing of a composite
return is going to be deemed an election
13

14. CON-WAY, INC. & AFFILIATES
V. DEPARTMENT OF REVENUE
• Oregon Supreme Court held that Business Energy Tax
Credits may be used against the corporation minimum
tax
• The DOR is interpreting this to apply to most other
credits, as well as including the R&D credit
• You may be able to get a refund and apply your credits
to the minimum tax by filing an amended return
• Credits may be used to offset minimum tax in future
years
• DOR is now processing refund claims (guidance
available)
• Amended returns are required if a protective claim
letter was filed before the decision
14

15. AT&T V. DEPARTMENT OF
REVENUE
• Oregon Tax Court adopted a “transactional” approach of
apportioning sales other than sales of tangible personal
property. Every transaction of a business is analyzed to
determine direct costs attributable to each state
o Massachusetts, in contrast, has used an “operational” approach,
where the business activity is views not as a series of transactions,
but as a singular operation
• The sales factor only includes “direct costs” – those that are
only incurred because the revenue producing transaction or
activity occurred. In other words, the court adopted a “but for”
approach to costs
• Oregon apportionment for service-based companies may be
affected by this decision
• We are seeing the ODOR use AT&T against out-of-state
taxpayers
• We are beginning to use AT&T to benefit in-state taxpayers
15

16. HEALTH NET, INC.
V. DEPARTMENT OF REVENUE
• Similar to The Gillette Co. v. Franchise Tax Board in California’s
Court of Appeals
o Issue is whether a taxpayer may elect to apportion income under the
Multistate Tax Compact in lieu of the state specific apportionment
provisions (e.g., single sales factor)
o CA COA held that California could not enact a statute that repealed the
provisions of the MTC without completely withdrawing from the
Compact. They subsequently withdrew from the MTC compact
• Currently under advisement in the Oregon Tax Court and
referred to the Regular Division
• Taxpayers may file a protective claim with the DOR pending the
result of the Health Net decision
• In response to this case, Oregon has withdrawn from the MTC
compact and reinstated it without the evenly weighted
apportionment formula
16

17. OREGON ENTERPRISE ZONES
• Sponsored by municipal or tribal governments, Oregon
has 50 rural and 13 urban EZs
• Qualifying businesses receive a three year, up to five
year property tax exemption for new buildings,
machinery and equipment
• Additionally, a construction-in-process exemption may
apply for up to two years prior to the property being
placed in service
17

18. E-COMMERCE OVERLAY
TO ENTERPRISE ZONES
• Several of Oregon’s 60+ EZs have received special status to further
encourage electronic commerce (“E-Commerce”)
• Current E-Commerce Zones include: Bend, East Portland, Greater
Redmond, Hillsboro, Jackson County, Medford, Portland, Roberts
Creek, Rogue, Salem and City of North Plains
• The most significant feature is that a qualifying business may
receive a credit against the taxpayer’s (or shareholder’s) annual
state income or corporate tax liability up to $2 million per year
• Credit equals 25% of the investment cost made in capital assets
used in e-commerce operations inside the EZ
• These incentives are in addition to the property tax incentives of the
standard EZ program
• We are seeing very poor compliance with companies taking
advantage of the benefits of this incentive
18

19. RURAL RENEWABLE ENERGY
DEVELOPMENT PROGRAM (“RRED”)
• The RRED program provides ad valorem property tax
exemption for a period of 3 to 5 years for certain
renewable energy projects that meet program
requirements
• HB 2981 created some exceptions to these
requirements when:
o The governing body of zone sponsor adopts a resolution
waiving employment requirements; and
o A $5 million investment is made
• RRED zones include, among others: Clackamas, Crook,
Harney, Jefferson, Klamath, Lake, Linn, Malheur, Polk,
Sherman, Union and Wasco Counties
19

20. OREGON PROPERTY TAX –
LEGISLATIVE UPDATE
• During the 2013 Legislative Session the Legislature
o Extended the food processing equipment
exemption
 Applications and applicable fee due by December 31, 2013
 Refund available if tax already paid
o Property tax refund opportunity
 Transmission property, leased to the Bonneville Power
Administration (“BPA”), on US owned land, subject to a
bargain purchase by the BPA at the end of the lease
 Refund claims are due by December 6, 2013
 Can go back to 2008 tax year
20

21. OREGON TRANSFERABLE
CREDIT UPDATE
• Business Oregon Tax Credit (“BETC”) – program was partially
sunset 12/31/12 and will be officially sunset 7/1/2014. Many
projects are still being completed that will generate credits
• Credits can be transferred for 24 months after their final certificate
has been issued
• Time is running out to purchase BETC. Can be purchased for 73.6
cents on the $1 (only a couple of 67 cent BETC are out there)
• Biomass Tax Credit – the program is still in place through
12/31/2017. Department of Energy continues to develop policy to
reduce dollar size of the program
• Credits can be purchased for 90 cents on the $1 and used
immediately
• Film Credit/Renewable Energy Grant Credit – Both credits are
transferred through the auction process. Bids open at 95 cents.
Opportunity for individuals to reduce federal AMT
21

22. OTHER STATE TRANSFERABLE
CREDITS
• Most active states for transferable credits offered by
Moss Adams are:
o Alaska, Connecticut, Louisiana, Oklahoma, Oregon,
and Pennsylvania
• Other available states are:
o Arkansas, Florida, Illinois, Iowa, Massachusetts,
and West Virginia
22

23. WHY PURCHASE TRANSFERABLE
CREDITS?
• Offset taxes and reduce your total
income/franchise/premiums tax liability
• Lower your effective tax rate
• Offset trapped capital losses with gain on discount
• Support various industries
• Diversify your investment portfolio
23

24. MOSS ADAMS TAX CREDIT
EXCHANGE
• Moss Adams is planning a launch of a new online tax
credit exchange platform located at:
o www.theoix.com/mossadams
• Only state certified credits are listed
• Approved members can:
o List credits for sale and set offer price and terms
o Buy credits listed, bid on credits, or post nonbinding
indication of demand
24

25. CALIFORNIA UPDATE
25

26. ENTERPRISE ZONE
PROGRAM CHANGES
• Assembly Bill 93 (signed into law 7/11/13) places strict hiring
requirements on the reformed program
• Sales tax credit is repealed and replaced by a partial sales and use
tax exemption; old credit can still apply for items PIS during 2014
• Hiring Credit will be limited to companies that have a net increase in
full-time employees who are paid between $12 and $28 an hour
• Hiring Credit only available to employees that are a member of one
of the following targeted groups: long-term unemployed, certain
veterans, Federal EIC recipients, ex-offenders and welfare recipients
o Will be unavailable to retail, food service, and other specified industries
o Existing hiring credit will be available for qualified employees hired before
December 31, 2013
• New incentives available January 2014. After 2013, any unused
credit carry-forwards will be limited to 10 years
• Companies that have not done a study should complete a study.
Employees hired by 12/31/13 can be vouchered through 12/31/14
26

27. MANUFACTURING AND
RESEARCH & DEVELOPMENT
PARTIAL SALES TAX EXEMPTION
Effective July 1, 2014 (signed into law by Governor Brown as part of
Assembly Bill 93 and Senate Bill 90)
o Applies to both sales and leases of qualifying property
o Expires on July 1, 2022, unless otherwise extended
o Partially tax exempt from California's sales and use tax
o Saving $41.88 for every $1,000 in purchases of qualifying property
 State general fund portion of the sales and use tax (4.188%)
o Tax-exempt property could include:
 machinery and equipment, including component parts
 equipment and devices used or required to operate, control,
regulate, or maintain the machinery
 pollution control items
 certain special purpose buildings and foundations
27

28. MANUFACTURING AND
RESEARCH & DEVELOPMENT
PARTIAL SALES TAX EXEMPTION
•
•
•
Must be used 50 percent or more in one of the following activities:
o Manufacturing, processing, refining, fabricating, or recycling tangible
personal property
o Researching and developing
o Maintaining, repairing, measuring, or testing any qualified property
There is a $200 million exemption limit per person on purchases of
qualified property in any calendar year
The exemption is available only to businesses classified under 2012 NAICS
o Codes 3111–3399 (manufacturing),
o Code 541711 (biotech research and development), and
o Code 541712 (physical, engineering, and life sciences R&D)
28

29. CALIFORNIA PERSONAL INCOME
TAX INCREASES
• Nov. 6, 2012 passage of Prop 30 increased personal
income tax rates
• They applied retroactively to 2012
• Increase is temporary for next seven years
29

30. CALIFORNIA - MARKET SOURCING
• For taxable years beginning on or after January 1,
2013, sales, other than sales of tangible personal
property, are sourced to California using a marketbased approach
• For taxable years between 2010 and 2012, market
sourcing is used if the taxpayer elects to have a singlefactor sales formula
• In general, sales from services are assigned to
California to the extent that the purchaser of the
service receives the benefit of the service in California
o Sales of intangibles are sourced to California to the
extent the property is used in California
30

31. CALIFORNIA – ECONOMIC NEXUS
RECENT EVENT
•
•
•
•
•
•
California adopted an economic nexus standard for tax years beginning January 1, 2011
Nexus deemed to be created when more than one of the following exists:
o CA sales exceed the lesser of $500K or 25% of total
o CA property exceeds the lesser of $50K or 25% of total
o CA payroll exceeds the lesser of $50K or 25% of total
P.L. 86-272 still applies with exception of the California $800 minimum tax
Throwback rule: Sales of TPP are included in the numerator of the California sales
factor if the TPP is shipped from an office, store, warehouse, factory, or other place of
storage in California to another state if the selling taxpayer is not taxable in the state of
the purchaser
In CCR 2012-03 (8/28/12), the FTB applied the new economic nexus standard, the
Finnegan rule, and market-based sourcing to negate the throwback rule holding:
o A taxpayer does not have to throw back TPP sales where it has more than
$500,000 of sales in a foreign jurisdiction; or
o Domestic tangible personal property sales when a member of its California unitary
group has more than $500,000 of sales (including sales other than tangible
personal property) in the destination state
Provides an opportunity to create “no-where” income
31

32. WASHINGTON UPDATE
32

33. WASHINGTON – MARKET
BASED SOURCING
• Effective 6/1/2010, Washington adopted market-based
sourcing rules for non-tangible receipts for purposes of
the B&O tax
• The B&O tax apportionment is calculated based solely on
a “receipts factor”
• Receipts are attributed to the state based primarily on
where the customer received the benefit of the service
• We continue to see a lot of audit and refund opportunity
around this area
• There are specific rules for determining where the
benefit is received in certain industries
33

34. WASHINGTON B&O TAX:
ECONOMIC NEXUS
•
•
•
•
•
•
•
•
Economic nexus rules adopted in 2010:
o Property: Average value exceeding $50,000;
o Payroll: Exceeding $50,000;
o Sales: Exceeding $250,000; or
o At least 25% of worldwide property, payroll, or sales
Business does not need to have physical presence to be subject to B&O tax
Applies to businesses that provide services, loan interest or fees, and royalties
Companies selling services may need to review their sourcing methodology
Physical nexus standards still apply to businesses making retail or wholesales
Out-of-state companies selling other-than-TPP may need to review their
sourcing methodology
Washington Dept. of Revenue aggressively auditing out-of-state companies to
assert nexus
Companies still using the old cost method of apportionment can file refund
claims
o There is a 4 year, plus the current, statute of limitations which runs on
12/31 each year
34

35. SERVICE AND OTHER ACTIVITIES
B&O TAX
• WA Legislature declined to extend the temporary
.3 percent service & other activities B&O tax rate
surcharge. Thus, effective July 1, 2013, the
service & other activities B&O tax rate is reduced
back to 1.5 percent
35

36. WASHINGTON –
COMMON PAYMASTER LAW
• There has been a lot of audit activity and litigation around
payment of common expenses among affiliated groups
• The business community has been especially focused on
centralized and allocated payroll expenses
• SB 5882, effective October 1, 2013, provides advances and
reimbursements received by a Common Paymaster may be
deducted from the measure of B&O tax in certain situations
• “Common Paymaster” is a term for centralized payroll and related
human resources services for affiliated entities
• No exclusion is allowed under the new law for any employee costs
incurred in connection with a contractual obligation of the
taxpayer to provide services
• WA DOR just released a Special Notice on this law change
(9/27/13)
36

37. TEXAS UPDATE
37

38. TEXAS FRANCHISE TAX
• Texas imposes a franchise tax on business entities
that have physical presence in the state
o Having a salesperson enter the state (for even one
day) is enough to create nexus
• P.L. 86-272 protections do not apply
• Tax is imposed on the lesser of:
o 70% of gross revenue
o Gross revenue less compensation
o Gross revenue less cost of goods sold (“COGS”)
• Are you maximizing the COGS deduction?
38

39. TEXAS FRANCHISE TAX
Opportunity #1: Calculate allowable Texas COGS under Texas definitions
•
•
•
•
•
•
•
Texas COGS should be calculated separately from Federal COGS
Recent changes: Amended COGS rule & internal memorandum to clarify that indirect
(supervisor) labor costs related to production and resale activities are included in
Texas COGS, as well as employee benefits (health care, travel, meals &
entertainment, etc.), pension and other related costs
The amended rule references Treasury Rules interpreting IRC Secs. 263A and 460,
regardless of whether the taxpayer is required to or actually capitalizes the costs for
federal income tax purposes
When calculating Texas COGS, a taxpayer need not make the same elections or follow
the same safe harbor rules as it does on its federal tax return
The amended rule also clarifies that property and other taxes paid in relation to
acquiring or producing any material are includable in Texas COGS
Service or administrative costs, including mixed service costs which are allocable to
the acquisition or production of goods, may be considered COGS, though the
includible amount cannot be more than 4 percent of the taxpayer's total indirect or
administrative overhead costs
Other differences between Federal law and Texas law:
o
o
o
Research and development expenditures under IRC Sec. 174 are includable Texas COGS
Warranty costs are includable Texas COGS
On-site storage costs are includable Texas COGS
39

40. TEXAS FRANCHISE TAX
Opportunity # 2: Calculation of Service Costs
o A taxpayer can subtract as COGS overhead and administrative costs
(“service” costs) that are reasonably allocable to the acquisition or
production of goods
o The includible amount may not exceed 4% of total indirect and
administrative overhead costs
o Make sure you are including all eligible service costs in the calculation
of the 4% cap
 All G&A expenses except for COGS and specifically excluded
expenses such as advertising, interest, and selling expenses
Other Changes – House Bill 500
• Franchise tax rates are temporarily reduced
• Allows additional businesses to qualify as retailers (reduced tax rate)
• Expands deductions for certain businesses
• Multiple other changes
Refund Deadline
• Statute runs on November 15 for extended 2008 tax year returns
40

41. NATIONAL UPDATE
41

42. AFFILIATE NEXUS &
AMAZON LAWS
• Some states have passed laws creating a presumption of
nexus if a business has an in-state affiliate
• These laws focus on in-state affiliates acting in a
representative capacity for the out-of-state company where
an agency or affiliate nexus has been created
• Merely separating in-state activities to a separate legal entity
will likely not be enough anymore to “contain” nexus for
income and sales tax purposes
• Many states are also adopting “Amazon Laws” and clickthrough nexus regimes to attack out-of-state sellers of goods
o Generally, an 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
o Adopted in AR, CA, CT, IL, MN, MO, NC, NY, OH, PA, RI, SC (2016), VT
o Many other states are considering
42

43. ECONOMIC NEXUS
• States are increasingly moving towards adopting economic nexus
standards to capture companies deriving income from sources
within the state but may not have any physical activity in the state.
Some have defined a specific dollar amount of sales, property or
payroll while others have more vague definitions
o Examples: Royalty, interest, service income, digital goods, etc.
• Sales of services or intangible receipts are not protected under P.L.
86-272. So states seemingly have the right to tax this income
absent passage of federal legislation or guidance from the Supreme
Court. A state tax nexus case has not been heard since 1992
• States are all over this and has brought a lot of new revenue to
states where companies have claimed no nexus
• 12 states have adopted and expect more in the future
43

44. ECONOMIC NEXUS
• Economic Nexus
o Income taxes imposed
when a specific dollar
amount of sales, property
or payroll
o Some states have more
vague definitions
o Applies to income from
services, royalties, interest,
digital goods
o P.L. 86-272 protects sales
of tangible personal
property
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 instate sources
• IA
• KY
• MN
• NJ
• OR
• WI
44

45. MARKET-BASED SOURCING
FOR APPORTIONMENT
• Alternative to Cost of Performance rule
• Under the Market-based approach, sales of services
are sourced to the state where the service or benefit
is received, or where the customer is located
• Market-based states: AL, AZ, CA, GA, IL, IA, ME, MD,
MA (2014), MI, MN, OH, OK, UT, WA, and WI
• Shifts revenue from instate service providers to outof-state service providers selling into the state
45

46. CLOUD SERVICE MODELS
Software as a Service (Saas)
•
•
•
•
Provides customer with access to software, usually over the Internet
There is no transfer of tangible personal property
The user pays a fee for access to the software
Examples:
•
•
•
•
Online email services
Automated human resources software
Medical/healthcare databases
Accounting & research systems
Infrastructure as a Service (IaaS)
•
•
•
•
•
•
Customer outsources its information technology functions
Provides customer with access to computing power, storage capacity, and other IT infrastructure
Customer may maintain control of the software environment
There is no transfer of tangible personal property
Customer pays a fee for access to a virtual machine
Examples of IaaS providers:
•
•
•
•
Amazon EC2
IBM
Rackspace
OpSource
46

47. CLOUD SERVICE MODELS
Why is this important? Companies
selling SaaS may have a sales tax
liability. Purchasers consuming SaaS
may have use tax liabilities
As cloud computing becomes more
common, more states are beginning
to tax hosted software
Most states now have specific sales
tax guidance for SaaS, but rules vary
widely. Taxability may depend on:
•
•
•
•
Whether a license or ownership
rights are granted to the
customer
Whether the software is
downloaded
Whether the software or server is
located within the state
Whether the vendor is providing
a “service” such as data
processing services or digital
automated services
SaaS Scorecard
SaaS is subject to sales & use tax in the
following states:
•
•
•
•
•
•
•
•
•
•
Arizona
Connecticut
District of Columbia
Hawaii
Idaho
Illinois
Indiana
Massachusetts
Michigan
New Mexico
•
•
•
•
•
•
•
•
•
•
New York
Ohio
Pennsylvania
South Carolina
South Dakota
Texas
Utah
Vermont
Washington
West Virginia
IaaS is a new concept that states are beginning to
address. Expect state guidance in the coming
years.
47

48. VOLUNTARY
DISCLOSURE
AGREEMENTS
48

49. VOLUNTARY DISCLOSURE
AGREEMENTS
• 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
• States 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
• May not apply if company has collected and not remitted sales tax
• This is a service we do in advance of an equity or sale transaction
frequently as due diligence teams always focus on these exposures
in their analysis
49

50. PARTING THOUGHTS
50

51. •
You may not be filing where you need to. Complete a nexus study and
state exposure analysis. State auditors are actively looking for your
skeletons
•
As state laws and cases change apportionment methodologies, you may
not be apportioning your company’s sales correctly. Complete an
apportionment study, as doing so may reduce your overall tax liability
•
Your company may not be taking all credits it is entitled to, review where
and how you are doing business to determine credits you and your
shareholders can take benefit from
•
If your company has known exposure in states where it is not currently
filing, seek a voluntary disclosure agreement
•
If you receive a state phishing letter, have a state tax professional review it
before responding
•
If your company is paying material tax in Oregon or other states, purchase
transferrable credits. If you currently are earning transferring credits,
consider monetization
•
Do a review of your SaaS vendors
51

52. Federal and State R&D
Credit Updates
Presenters:
Star Fischer, CPA – Senior Manager
52

53. TOPICS COVERED
• Overview of R&D Credit and Expenditures
• Recent Trends in IRS Examinations
• Proposed Regulation 1.172-2: Definition of
Research Expenditures
• Geosyntec Consultants, Inc. v. U.S. (112 AFTR
2013-5488)
• U.S. v. Davenport (110 AFTR 2d 2012-5927)
• Washington State R&D Credit Opportunities
• Oregon R&D Credit Opportunities
• California R&D Credit Opportunities
53

54. R&D EXPENSE AND
CREDIT OVERVIEW
• Governed by IRC 41 and 174
• New or significantly improved product or processes
• 4 Part Test
o
o
o
o
Business Component (Qualified Purpose)
Technical Uncertainty
Process of Experimentation
Technological in Nature
• Qualified Expenses
o Wages
o Supplies
o Contract Research (at 65% of cost)
• Total federal credit is approximately 6.5% of qualified
expenditures
• Credits can carry back 1 year and forward 20
54

55. RECENT TRENDS IN
IRS EXAMINATIONS
• Issue Practice Groups (IPGs)
o Replaces IRS Tiered Process
• Identification of business components is
mandatory
o Bayer Corporation & Subs v U.S. (109 AFTR 2d 2012802)
• Documentation of qualified activities
55

56. RECENT TRENDS IN IRS EXAM
CONTINUED
• Differences between IRS Field Exam and Appeals
Processes
• Renewed Emphasis on Audit Technique Guides
o
o
o
o
General (June 2005; updated May 2008)
Pharmaceutical (April 2004)
Aerospace (January 2005)
Audit Guidelines on the Application of Process of
Experimentation for all Software
• Schedule UTP (Uncertain Tax Positions)
56

57. PROPOSED REGULATION 1.174-2
• Significant impact on the definition of qualified
R&D expenditures and credit
• “The ultimate success, sale, or use of the product
is not relevant to the determination of
eligibility”
• Defines “pilot model” to include a fullyfunctional representation of the product
• Taxpayers may rely on these proposed
regulations until finalized (Prop. Reg. 1.1742(d))
57

58. EXAMPLE FROM
PROP. REG. 1.174-2
•
Example (7). X is a manufacturer of aircraft. X is researching and developing a new,
experimental aircraft that can take off and land vertically. To evaluate and resolve
uncertainty during the development or improvement of the product and test the
appropriate design of the experimental aircraft, X produces a working aircraft at a cost
of $5,000,000. The $5,000,000 of costs represents research and development costs in
the experimental or laboratory sense. In a later year, X sells the aircraft. Because X
produced the aircraft to resolve uncertainty regarding the appropriate design of the
product during the development of the experimental aircraft, the aircraft is a pilot
model under paragraph (a)(4) of this section. Therefore, the $5,000,000 of costs that X
incurred in producing the aircraft qualifies as research or experimental expenditures
under section 174. Further, it would not matter if X sold the pilot model or
incorporated it in its own business as a demonstration model. See paragraph (a)(1) of
this section (ultimate use is not relevant)
58

59. GEOSYNTEC CONSULTANTS, INC.
V. U.S.
• Are R&D costs incurred in connection with
customer contracts eligible for the credit?
• Primary issue: Funded Research
o Taxpayer must retain substantial rights and have
economic risk of failure
• Court decided based on type of customer
contracts
o Fixed Fee/Lump-Sum – Qualified
o Cost-Plus– Not Qualified
o Guaranteed Maximum (Cost-Plus with a Maximum) –
Not Qualified
59

60. GEOSYNTEC CONSULTANTS, INC.
V. U.S.
• Application of decision
o Defines key attributes of contract language that
proves the taxpayer has economic risk of failure.
o Engineering and other professional service firms
can be eligible for the credit
o Contract type does not necessarily determine
funded research, but is definitely a strong
indication
o First court case on funded research unrelated to
government contracts
60

61. U.S. V. DAVENPORT
• Issue: Whether or not activities related to
implementation of an ERP system is qualified
• Relevant Facts Considered
o Software was implemented to automate and integrate
aspects of the business
o Software was purchased off the shelf and modifications
were made
• Conclusion
o Activities did not meet the process of experimentation test
o Activities were more of a quality control/adaptation
nature than to develop additional functionality or features
61

62. WASHINGTON R&D CREDIT
• Governed by RCW 82.04.4452
• For years ending after 12/31/10, credit is 1.5% of qualified
expenditures (over a base amount)
• Qualified Research is defined by RCW 82.63.010
o Advanced Computing
o Advanced Materials
o Biotechnology
o Electronic Device Technology
o Environmental Technology
• Credit cannot exceed $2 million
• Survey must be filed with the state by April 30th of the year
following the credit being claimed
• Although different rules, much of the federal qualified expenditures
will be eligible (if in qualified area)
62

63. OREGON R&D CREDIT
• Governed by ORS 317.152, 317.153, and
317.154
• Definition of qualified research closely follows
IRC 41 with some exceptions
o Only research performed in the state is eligible
o Oregon has an alternative method that can be
optimized by state apportionment
o Partnerships are not eligible
o Credits carry forward five years if not used
o Maximum credit is $1 million for 2012 forward; $2
million for years 2006 – 2011
63

64. CALIFORNIA R&D CREDIT
• California Revenue and Taxation Code 23609
• Follows federal definition of qualified research with
some exceptions
o Research must be conducted in the state of California
o Unique base threshold calculations
o California Alternative Incremental Credit
o Credits carry forward indefinitely if not used
• FTB Examinations
o R&D credits are highly examined
o Significant adjustments are common upon examination
o Appeals proceedings are often necessary to retain any benefit
64

65. KEY TAKEAWAYS
• The R&D credit remains a top priority audit
issue with the IRS
• It is key to documentation and support
positions in a methodology that is accepted and
auditable
• The IRS Appeals process is often required to
retain the maximum benefit
• Court cases are decided and other guidance is
issued frequently that significantly impacts
positions related to the R&D credit
• Most states offer an R&D credit that resembles
the federal credit
65