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At its 47th Annual Conference and Committee Meetings (July 28-31, 2014), the Multistate Tax Commission (MTC) moved forward on several important proposed amendments to the Multistate Tax Compact’s Uniform Division of Income for Tax Purposes Act (UDITPA) provisions. For example, on July 30, the full MTC voted to approve the following Compact amendments:

 

  • Art. IV.1(a), Definition of Business Income. The definition of "business income" is replaced with a more expansive definition of "apportionable income" (includes “all income that is apportionable under the Constitution of the United States and is not allocated under the laws of” the enacting state). Conversely, the definition of "nonbusiness income" is replaced with a definition of "nonapportionable income."

 

  • Art. IV.9, Factor Weighting. The Compact’s current equally-weighted three-factor apportionment formula is replaced with the adopting state’s apportionment formula (although the MTC recommends using a double-weighted sales factor formula).

 

  • Art. IV.1(g), Definition of "Sales." The definition of “sales” is replaced by the definition of “receipts,” which is limited to receipts from transactions and activity in the regular course of the taxpayer’s trade or business. Receipts from hedging transactions and from the disposition of cash or securities (i.e., treasury functions) are specifically excluded from the definition.

 

  • Art. IV.17, Sales Factor Sourcing for Services and Intangibles. The current cost-of-performance sourcing rule for receipts from sales of intangible property and services is replaced with market-based sourcing rules. The “reasonable approximation” of an assignment is permitted if the market state cannot be determined using the provided guidelines. In addition, a “throwout rule” applies if the taxpayer is not taxable in the state to which a sale is assigned or if the market state cannot be reasonably approximated.

 

  • Art. IV.18(b), Distortion Relief. A state’s tax administrator may establish rules or regulations for determining alternative allocation and apportionment if the standard allocation and apportionment provisions do not fairly represent the extent of business activity in the state of taxpayers engaged in a particular industry or in a particular transaction or activity. Any regulation adopted must be applied uniformly (subject to adjustment for affected taxpayers).


Corresponding changes to the MTC’s model allocation and apportionment regulations are expected to follow.

 

In addition, on July 31, the MTC Executive Committee approved a separate set of amendments to the Compact’s UDITPA provisions that would establish the burden of proof where an alternative method of apportionment is proposed (Art. IV.18(c)). Under the proposed amendments, the taxpayer petitioning for, or the tax administrator requiring, the use of an alternative method must prove (1) that the standard allocation and apportionment provisions do not fairly represent the extent of the taxpayer’s activity in the state; and (2) that the alternative method is reasonable. The standard of proof is left to the state to decide. Other, non-substantive changes to the alternative apportionment provisions regarding penalties and agreements with the state were also approved. These proposed changes now move forward to the MTC’s state survey process where they are circulated to the MTC members to determine if the affected members will consider adoption of the recommendations within their respective jurisdictions.

 

Other corporate income tax-related developments during the MTC meetings included:

 

  • Hearing officer’s report on proposed amendments to financial institution allocation and apportionment provisions was approved and moved to the member survey stage (July 31, Executive Committee);
  • Proposed project on the use of trusts for state tax avoidance was allowed to proceed (July 28, Uniformity Subcommittee on Income and Franchise Tax);
  • Proposed projects on sourcing of cloud computing services and sourcing of electricity were tabled for now to save resources for revisions to the MTC’s model allocation and apportionment regulations expected following adoption of the UDITPA changes described above (July 28, Uniformity Subcommittee on Income and Franchise Tax); and
  • MTC Policy Statement 2009-01, which urges Native American tribes and states to resolve tribal-state tax issues through negotiated agreements rather than through the courts, was renewed (July 30, full MTC).

Several states are holding back-to-school sales tax holidays in August this year. Items that will be exempt from sales tax during the holidays vary from clothing, footwear, and school supplies to computers and related equipment. Many states exclude clothing and footwear accessories, as well as athletic and protective clothing and footwear, from their tax holidays.

 

Here are the details for the states that are holding a back-to-school sales tax holiday in August 2014. 

 

Alabama, August 1-3: The tax holiday applies to clothing, but not accessories or protective or recreational equipment, with a sales price of $100 or less per item; single purchases with a sales price of $750 or less of computers, computer software, school computer equipment; noncommercial purchases of school supplies, school art supplies, and school instructional materials with a sales price of $50 or less per item; and noncommercial book purchases with a sales price of $30 of less per book.

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Arkansas, August 2-3: The tax holiday applies to clothing items under $100, clothing accessories or equipment under $50, school art supplies, school instructional materials, and school supplies. The tax holiday does not apply to protective equipment or sports or recreational equipment.

 

Connecticut, August 17-23: The tax holiday applies to clothing and footwear that costs less than $300 per item, but does not apply to athletic or protective clothing or footwear, jewelry, handbags, luggage, umbrellas, wallets, watches, and similar items.

 

Florida, August 1-3: The tax holiday applies to clothing, wallets, bags, handbags, backpacks, fanny packs, and diaper bags (excluding briefcases, suitcases, and other garment bags) with a sales price of $100 or less per item; school supplies with a sales price of $15 or less per item; and the first $750 of the sales price of personal computers or personal computer-related accessories purchased for noncommercial home or personal use. The tax holiday does not apply to sales made within a theme park or entertainment complex, a public lodging establishment, or an airport.

 

Georgia, August 1-2: The tax holiday applies to computers, computer components, and prewritten computer software purchased for noncommercial home or personal use having a sales price of $1,000 or less per item; clothing having a sales price of $100 or less per item; and school supplies, school art supplies, school computer supplies, and school instructional materials purchased for noncommercial use having a sales price of $20 or less per item.

Iowa, August 1-2: The tax holiday applies to clothing and footwear with a sales price of less than $100 per item, but does not apply to accessories, rentals, or athletic or protective items.

 

Louisiana, August 1-2: The tax holiday applies to the first $2,500 of the sales price of noncommercial purchases, but not leases, of items of tangible personal property, excluding vehicles and meals. The tax holiday does not apply to local taxes, but St. Charles Parish will waive its local sales tax during the same weekend as the state's tax holiday.

 

Maryland, August 10-16: The tax holiday applies to items of clothing (excluding accessories) and footwear with a taxable price of $100 or less.

 

Missouri, August 1-3: The tax holiday applies to noncommercial purchases of clothing, but not accessories, with a taxable value of $100 or less per item; school supplies up to $50 per purchase; computer software with a taxable value of $350 or less; and personal computers and computer peripherals up to $3,500. Localities may opt out of the tax holiday. Also, if less than 2% of retailer's merchandise qualifies, the retailer must offer a tax refund in lieu of a tax holiday.

 

New Mexico, August 1-3: The tax holiday applies to footwear and clothing, but not accessories or athletic or protective clothing, with a sales price of less than $100 per item; school supplies with a sales price of less than $30 per item; computers with a sales price of $1,000 or less per item; computer peripherals with a sales price of $500 or less per item; book bags, backpacks, maps, and globes with a sales price less than $100 per item; and handheld calculators with a sales price of less than $200 per item. Retailers are not required to participate in the tax holiday.

 

Oklahoma, August 1-3: The tax holiday applies to items of clothing and footwear with a sales price of less than $100, but does not apply to accessories, rentals, or special clothing or footwear primarily designed for athletic or protective use.

 

South Carolina, August 1-3: The tax holiday applies to clothing (excluding  rentals), clothing accessories, footwear, school supplies, computers, printers, printer supplies, computer software, bath wash clothes, bed linens, pillows, bath towels, shower curtains, and bath rugs.

 

Tennessee, August 1-3: The tax holiday applies to clothing (excluding  accessories), school supplies, and school art supplies with a sales price of $100 or less per item; and computers with a sales price of $1,500 or less per item.

 

Texas, August 8-10: The tax holiday applies to clothing and footwear (excluding accessories, athletic  protective items, and rentals), school supplies, and school backpacks with a sales price of less than $100 per item.

 

Virginia, August 1-3: The tax holiday applies to clothing and footwear with a selling price of $100 or less per item, and school supplies with a selling price of $20 or less per item.

 

In addition, Mississippi held a tax holiday July 25-26. This tax holiday applied to clothing and footwear with a sales price under $100 per item, but did not apply to accessories, rentals, skis, swim fins, or skates.

 

Happy shopping!

 

As CCH’s Jennifer Troyer has reported, the Michigan Supreme Court has held that (1) a taxpayer was allowed to elect to use the three-factor apportionment formula under the Multistate Tax Compact (MTC) for the 2008 Michigan business tax (MBT) year, and (2) the MTC’s apportionment formula could be used to apportion the MBT base subject to the modified gross receipts tax because the modified gross receipts tax qualified as an "income tax" for purposes of the MTC. (International Business Machines Corp. v. Department of Treasury, Michigan Supreme Court, No. 146440, July 14, 2014)

 

Implied Repeal of MTC in Michigan
First, the court considered whether the Legislature repealed the MTC’s election provision by implication when the MBT was enacted. The court concluded that the MTC’s election provision was not repealed by implication. Repeals by implication are disfavored. If the Legislature had intended to repeal the law, it could have been explicit. The court noted that statutes claimed to be in conflict should be construed harmoniously to find any other reasonable construction other than a repeal by implication. Thus, the MTC’s three-factor apportionment formula election and the MBT’s single-sales factor apportionment formula laws were in pari materia and had to be construed together.

 

The court reasoned that the MTC’s election provision ("may elect") contemplated a divergence between the party state’s mandated apportionment formula and the MTC’s own formula, either at the time of the MTC’s adoption by the party state or at some point in the future. Accordingly, the taxpayer could choose (1) the MTC and use the three-factor apportionment formula or (2) Michigan tax law and use the single-sales factor apportionment formula. By subsequently repealing the MTC’s election provision starting January 1, 2011, the Legislature created a window in which it did not expressly preclude the use of the MTC’s election provision.

 

Modified Gross Receipts Tax Portion of MBT
Second, the court considered, for purposes of the MTC, whether the modified gross receipts tax portion of the MBT was an "income tax." The court concluded that the modified gross receipts tax portion of the MBT was an income tax. The MTC election is available to any taxpayer subject to an income tax. Under the MTC’s broad definition of "income tax," a tax is an income tax if the tax measures net income by subtracting expenses from gross income, with at least one of the expense deductions not being specifically and directly related to a particular transaction. After examining how the modified gross receipts tax portion of the MBT was calculated, the court determined that the term "gross receipts" in Michigan was similar to "gross income" under the federal income tax law. There was at least one expense deduction allowed under the MBT that was not specifically and directly related to a particular transaction. As such, the modified gross receipts tax portion of the MBT qualified as an income tax for the MTC. This allowed the three-factor apportionment formula election to be applied to this portion of the MBT as well as the income tax portion of the MBT.

Louisiana Gov. Bobby Jindal has signed legislation (Act 822 (H.B. 663), Laws 2014) that makes several changes to the Tax Delinquency Amnesty Act of 2013, which requires the Louisiana Department of Revenue (LDR) to develop and implement a tax amnesty program applicable to all taxes administered by the LDR, except for motor fuel taxes and penalties for failure to submit information reports that are not based on an underpayment of tax. First, the legislation expands the scope of the amnesty program to include:

 

  • taxes for taxable periods that began before 2014 (previously, before 2013);
  • taxes for which the LDR and the taxpayer have entered into an agreement to toll the statute of limitations until the end of 2014 (previously, until the end of 2013);
  • for the 2014 amnesty program, taxes due prior to 2014 for which the LDR has issued a proposed assessment, notice of assessment, bill, notice, or demand for payment not later than May 31, 2014; and
  • for the 2015 amnesty program, taxes due prior to 2015 for which the LDR has issued a proposed assessment, notice of assessment, bill, notice, or demand for payment not later than May 31, 2015.

 

In addition, the legislation permits 100% of penalties and 50% of interest to be waived during the 2014 amnesty period (previously, 15% of penalties and no interest), making those parameters identical to the completed 2013 amnesty period. For the 2015 amnesty period, 33% of penalties and 17% of interest may be waived (previously, 10% of penalties and no interest). However, a taxpayer will be subject to double penalties if there is a final judgment rendered against the taxpayer by a court or if the taxpayer has exhausted all rights to protest taxes owed to the state 90 days prior to either the 2014 or the 2015 amnesty period, and the taxpayer then fails to submit an amnesty application before the end of the applicable amnesty period 90 days prior to which the final judgment was rendered or 90 days prior to which the taxpayer’s rights to protest taxes have been exhausted.

 

A taxpayer who disputes a portion of the amount of a delinquent tax assessed by the LDR may now be eligible to apply for amnesty if the taxpayer remits a complete one-time payment of that portion of the tax that is not in dispute, plus applicable interest and penalties, to the LDR prior to the end of the amnesty period for which the taxpayer applies. This payment is referred to as a "compromise amount." The LDR will then have 30 days to determine if the taxpayer should be granted amnesty based on the compromise amount paid. If the LDR approves the compromise amount paid by the taxpayer, the taxpayer will be granted amnesty. If the LDR rejects the compromise amount, amnesty will not be granted and the taxpayer will be responsible for the full amount of the delinquent tax, penalties, interest, and fees prior to his application for amnesty.

 

The legislation also authorizes the use of six-month installment payment agreements. However, taxpayers who apply for amnesty by opting to pay the tax and any applicable fees, costs, and interest in installments remain eligible to participate in the amnesty program only by making complete and timely payment of the entire amount due under the taxpayer's installment agreement. Taxpayers involved in field audits or litigation are not eligible for installment agreements under the amnesty program. All installment agreements must require the taxpayer to provide a down payment of no less than 20% of the total amount of delinquent tax, penalty, interest, and fees owed. In addition, taxpayers who cannot enter into an agreement to make payment by way of automated electronic transactions are not eligible for an installment agreement.

 

Under the new legislation, the LDR is prohibited from accepting tax credits as payment of any tax, interest, penalty, or fee paid as a result of participation in the amnesty program.

 

Finally, the legislation states that, after 2015, no new LDR amnesty programs are allowed before January 1, 2025.

As CCH’s Jennifer Troyer has reported, Rhode Island Gov. Lincoln D. Chafee has signed the 2015 budget bill (H.B. 7133), which for income tax purposes implements combined reporting, reduces the corporate income tax rate, adopts a 100% sales factor for apportionment, repeals the franchise tax, eliminates the captive REIT and related-party addback requirements, and makes other changes discussed below.

 

Combined Reporting
Applicable to tax years beginning on or after January 1, 2015, each C corporation that is part of a unitary business must file a combined return. In addition, an affiliated group may elect to be treated as a combined group. The election is binding for at least five years, unless earlier revocation is approved by the tax administrator. A combined report does not disregard the separate identities of the taxpayer members. A combined group will exclude as a member and disregard the income and apportionment factors of a corporation not incorporated in the United States if the sales factor outside the U.S. is 80% or more.

 

Net operating losses (NOLs) created before 2015 are allowed only to offset the income of the corporation that created the NOL. No deduction is allowed for NOLs sustained during a tax year in which the taxpayer was not subject to Rhode Island tax. For NOLs created in tax years beginning on or after January 1, 2015, there is no carryback and a five-year carryforward. NOLs are generally the same as under IRC §172. Tax credits earned before 2015 may only be used by the taxpayer that earned them. However, tax credits earned in tax years that begin on or after January 1, 2015, may be applied to other group members’ income. Furthermore, the tax rate reduction under the Jobs Development Act and the I-195 Redevelopment Act may be used against the net income of the entire group.

 

For taxpayers filing combined reports, estimated tax payments must be made that are (1) 100% of the tax due for the prior year plus any additional tax due to combined reporting; or (2) 100% of the current year tax liability.

 

"Combined group" is defined as a group of two or more corporations in which more than 50% of the voting stock of each member corporation is directly or indirectly owned by a common owner or owners, either corporate or non-corporate, or by one or more of the member corporations, and that are engaged in a unitary business. "Unitary business" means the activities of a group of two or more corporations under common ownership that are sufficiently interdependent, integrated or interrelated through their activities so as to provide mutual benefit and produce a significant sharing or exchange of value among them or a significant flow of value between the separate parts.

 

Corporate Income Tax Rate
Applicable to tax years beginning on or after January 1, 2015, the corporate income tax rate is reduced to 7% from 9% of net income.

 

Apportionment
Applicable to tax years beginning on or after January 1, 2015, C corporations apportion net income with a 100% sales factor. Currently, taxpayers apportion net income with an evenly-weighted property, payroll, and sales factor apportionment formula. A throwback rule is included. Among other things, sales include receipts from gross sales of tangible personal property, gross income from the performance of services where the recipient receives all of the benefit in Rhode Island, gross income from rentals of property situated in Rhode Island, and net income from the sale of securities or financial obligations. Furthermore, each unitary business group member must include all receipts in Rhode Island without regard to whether the member has nexus. Receipts between members included in the unitary business group are eliminated.

 

An independent appeals process is required to be established to resolve any disputes regarding the allocation method.

 

Franchise Tax
Applicable to tax years beginning on or after January 1, 2015, the franchise tax is repealed. Currently, the franchise tax is applied on authorized capital stock at a rate of $2.50 for each $10,000, with a minimum tax of $500.

 

Captive REIT, Related-Party Addbacks
Applicable to tax years beginning on or after January 1, 2015, for captive REITs, net income is not required to include the amount equal to the dividend paid deduction under the IRC. Also, the addback requirement for the deduction for interest expense and intangible expenses paid to one or more related members is removed.

 

S Corporation Minimum Tax
Applicable to tax years beginning on or after January 1, 2015, the law is amended to specify that S corporations are subject to a minimum tax, which is currently $500.

 

Jobs Development Act
Applicable to tax years beginning on or after January 1, 2015, the corporate income tax rate reduction available under the Jobs Development Act is allowed for combined groups. The formula to calculate the rate reduction is revised; the tax rate reduction is capped at 4% (previously, 6%).

 

I-195 Redevelopment Act of 2011
Applicable to tax years beginning on or after January 1, 2015, the corporate income tax rate reduction available under the I-195 Redevelopment Act is allowed for combined groups. The formula to calculate the rate reduction is revised; the tax rate reduction is capped at 4%.

 

Personal Income Tax
Effective July 1, 2014, when reporting the amount of use tax on a personal income tax return, a taxpayer must list the actual amount or the amount of use tax using a lookup table. The lookup table is a "safe harbor" alternative. Although the lookup table may be used, the actual amount of each single purchase must be listed if it is at least $1,000.

 

The tax administrator, by December 1, 2014, and each year thereafter, must notify any public employee who is not in compliance with the state income tax laws. The employee will be subject to mandatory wage garnishment. However, the employee will be deemed to be in compliance if he or she has entered into a payment agreement or has requested relief as an innocent spouse.

 

Applicable to tax years beginning on or after January 1, 2015, the earned income tax credit is 10% (previously, 25%) of the federal earned income tax credit. The refundable portion equals 100% (previously, 15%) of the amount by which the credit exceeds the tax.

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