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Apportionment Issues Answered! One of the most complex issues in administering state corporate income taxes is how to distribute the income of multistate corporations among the states in which they operate. The new CCH Apportionment Suite offers compliance-focused resources to help professionals conquer this problem area. Learn more and download your complimentary resources – a white paper on "State Apportionment of Business Income" plus our State Tax Review – at http://www.cchgroup.com/apportionment.

According to Columbus Business First, the Ohio Department of Medicaid is reviewing the application of state sales and use taxes to premiums received by Medicaid managed care organizations (MCOs) in light of a federal regulatory memo calling the practice into question. The state uses the tax revenue to obtain additional federal Medicaid matching funds, and increases the per-member monthly (capitation) payments to the plans in order to hold the MCOs harmless.

 

The July 25, 2014 memo from the Centers for Medicare and Medicaid Services states that amendments made in the Deficit Reduction Act of 2005 (DRA) terminated states’ ability to tax only Medicaid MCOs. The memo explains that "taxing a subset of health care services or providers at the same rate as a statewide sales tax, for example, does not result in equal treatment if the tax is applied specifically to a subset of health care services or providers (such as Medicaid MCOs), since the providers or users of those health care services are being treated differently than others who are not within the specified universe."

 

It remains unclear how other states imposing similar health care-related taxes on Medicaid MCOs will respond. In May, 2014, the Inspector General of the Department of Health and Human Services concluded that Pennsylvania’s gross receipts tax on Medicaid MCOs was impermissible for purposes of Medicaid funding. However, Michigan reinstated its use tax on Medicaid MCOs effective retroactive to April 1, 2014.

On its blog, Airbnb announced that it will begin collecting occupancy taxes on behalf of its San Francisco hosts on October 1, 2014. For reservations booked on or after October 1, Airbnb receipts will show a new line item for the 14% city-imposed transient occupancy tax. The tax applies to rentals of less than 30 days.

 

According to Airbnb, the collection of taxes was instigated by the local community. "Our community members in San Francisco have told us they want to pay their fair share and the overwhelming majority have asked us to help. In the past, it's been difficult for individual hosts to pay taxes that were designed for traditional hotels that operate year around."

 

On July 1, 2014, Airbnb started collecting hotel taxes totaling 11.5% on short-term Portland rentals. It remains uncertain, however, if Airbnb will reach similar agreements with other cities. In New York, concerned with tax evasion and the operation of illegal hotels, Attorney General Eric Schneiderman's office issued a subpoena against Airbnb, seeking information and records on Airbnb hosts.

In response to the Michigan Supreme Court's opinion in International Business Machines Corp. v. Department of Treasury, which held that IBM could use the three-factor formula provided in the Multistate Tax Compact (Compact) instead of the single sales factor formula required under the Michigan Business Tax (MBT) statutes, Gov. Rick Snyder has signed legislation repealing Michigan's adoption of the Compact retroactive to January 1, 2008 (see S.B. 156, Laws 2014).

 

In 1969, Michigan enacted the Compact, which contains an equally weighted three-factor apportionment formula. However, the Compact also gives taxpayers the option of apportioning income "in the manner provided by the laws of" Michigan. Effective January 1, 2008, Michigan enacted a separate law requiring use of a single sales factor apportionment formula for MBT purposes. In IBM, the court upheld the Compact provision permitting taxpayers to choose between the two apportionment formulas.

 

The new legislation takes away a taxpayer's ability to choose between the two formulas. So, only the single sales formula is available. Finally, the legislation also clarifies that the Compact's election provision is not available for purposes of the Michigan corporate income tax, which replaced the MBT effective January 1, 2012.

 

 

As David Caplan of CCH recently reported, the Washington Department of Revenue’s Appeals Division has ruled that visits to trade shows by employees of an out-of-state manufacturer and seller of custom sportswear were sufficient to establish nexus for purposes of Washington sales and use and business and occupation (B&O) taxes.

 

 

The taxpayer sold custom apparel for college, school, and club sport and spirit teams over the Internet, by telephone, and by catalog. The taxpayer’s sales were a mixture of retail and wholesale sales, and its orders were shipped from locations outside Washington to customers by common carrier.

 

 

The Appeals Division noted that the nexus standard under case law and Washington rule provisions is not whether the in-state activity directly solicits a sale but, rather, whether the activity is significantly associated with establishing or maintaining a market within the state. Further, there is no trade show exemption in any Washington statute or rule.

 

 

In this case, for a period of at least seven years, the taxpayer’s representatives made at least four visits per year to trade shows in Washington in which the company displayed its products, made contact with potential buyers, discussed its service model with potential buyers, and distributed its catalogs. The Appeals Division found that the direct presence of the taxpayer’s representatives at the Washington trade shows was significantly associated with establishing or maintaining a market for the sales of its products in Washington. The taxpayer engaged in those activities to increase familiarity with its brand and, in turn, promote the sales of its products. Accordingly, the Appeals Division ruled that the activities were sufficient to establish taxing nexus for Washington sales.

 

 

The text of the determination is attached.

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