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Advanced Income Tax Apportionment Issues
Confronting Multistate CompaniesTUESDAY, JULY 23, 2019, 1:00-2:50 pm Eastern
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July 23, 2019
Advanced Income Tax Apportionment Issues Confronting Multistate Companies
M.L. Castilla
CohnReznick
ML.Castilla@cohnreznick.com
William Pardue
Ryan
William.Pardue@ryan.com
Peter Rabinowitz
CohnReznick
Peter.Rabinowitz@cohnreznick.com
Notice
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any tax opinions, memoranda, or other tax analyses contained in those materials.
The information contained herein is of a general nature and based on authorities that are
subject to change. Applicability of the information to specific situations should be
determined through consultation with your tax adviser.
Agenda
• Sourcing of Receipts from Services and Intangibles –William Pardue
• Alternative Apportionment – Peter Rabinowitz
• Throwback/Throwout – William Pardue
• Joyce/Finnigan Issues – William Pardue
• Pass-through Entity Issues – Peter Rabinowitz
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Sourcing of Sales from Services and Intangibles
William Pardue, Ryan
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Sourcing of Receipts from the Sale of Non-Tangible Property (Cont.)
• Recent Developments
– New Jersey adopted market based sourcing for tax years beginning in 2019 and thereafter
– Hawaii switches to market based sourcing for tax years beginning on or after 12/31/2019
– California held fourth Interested Parties Meeting on add’l proposed amendments to the market-based sourcing reg (Cal. Code Regs. Title 18 §25136-2) on 07/19/2019
• Original reg issued in 2016 with first IPM in 2017
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Sourcing of Receipts from the Sale of Non-Tangible Property (Cont.)
– Comcast of Massachusetts I, Inc. & Others v. Commissioner of Revenue, 18-P-561, 04/26/2019
• Dispute over use of transactional approach rather than the operational approach to determine income-producing activity for purposes of identifying whether COP are greater in-state
– Dish DBS Corporation f/k/a EchoStar, DBS Corp., and Affiliates, v. South Carolina Department of Revenue, 2016-001642; 2018-UP-404, 10/31/2018
• South Carolina is not a pro rata COP state, nor is it a market share state
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Sourcing of Receipts from the Sale of Non-Tangible Property (Cont.)
– The Corporate Executive Board Company v. Virginia Department of Taxation, 171627 (Public Document Ruling No. 19-9), 02/07/2019
• Virginia sticks with COP despite trend shifting to market based sourcing
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Sourcing of Receipts from the Sale of Non-Tangible Property (Cont.)
• Market based sourcing
– Shift to market based sourcing• In 2014 and 2015, changes to model apportionment statute
adopted market based sourcing and recommended states use a double weighted sales factor.
• MTC follows MA regulations of market based sourcing
– Rationale• The complexity of sourcing receipts from non-tangible property
• Administrative burden on all parties to determine costs of performance components
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Alternative Apportionment
Peter Rabinowitz, CohnReznick
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Alternative Apportionment
• The standard Alternative Apportionment provision is found in UDITPA § 18
– If the allocation and apportionment provisions of this Act do not fairly represent the extent of the taxpayer’s business activity in this state, the taxpayer may petition or the [tax administrator] may require alternative apportionment
• Burden of Proof varies based on state specific law
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Alternative Apportionment
• Recent Developments– Arkansas ALJ Docket No. 18-467, 03/07/2019
• Double-weighted sales factor required for calculation of business income unless the taxpayer petitions the Department in writing for permission to use alternative apportionment formula prior to doing so; filing of return doesn’t constitute petition
– Staples, Inc., v. Comptroller of the Treasury, Docket No. 2597, 08/09/2018– Mississippi Department of Revenue v. Comcast of Georgia/Virginia, Inc., n/k/a
Comcast Cable Communications, LLC, G-2017-1147, 06/13/2019– Illinois Dept. of Rev. GIL No. IT-18-0003-GIL, 10/23/2018– Indiana Letting of Finding, No. 02-20171267, 02/01/2019– Maryland Guidance on the Reporting and Taxation of IRC § 951A GILTI,
05/13/2019– Maryland Guidance on the Reporting and Taxation of IRC § 965 Repatriation
Income for Tax Year 2017, 10/05/2018– Michigan Revenue Administrative Bulletin 2018-28– Missouri Policy Guidance: TCJA – IRC § 951A GILTI, 01/30/2019– North Carolina Corporate Technical Bulletin No. II, 01/01/2018– California FTB Legal Ruling No. 2019-01, 06/07/2019
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Throwback/Throwout: Common Issues
William Pardue, Ryan
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Economic Nexus Impact on Throwback/Throwout
William Pardue, Ryan
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Foreign Sales Income and Throwback/Throwout
William Pardue, Ryan
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Joyce/Finnigan Positions
William Pardue, Ryan
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Joyce/Finnigan Nexus Controversies
• Texas receipts include “the gross receipts of each taxable entity that is a member of the combined group and that has a nexus with this state for the purposes of taxation.” (TX Tax Code Sect. 171.103)
• What nexus standard applies?
– Physical presence?
– P.L. 86-272 (in-state solicitation protected)
– Economic presence?
– Factor presence?
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Joyce/Finnigan PTE Issues
• What about states that directly tax various PTE’s/DE’s? E.g., Texas?• Companies often overlook the Joyce/Finnigan impacts on otherwise
disregarded entities. Assume a stand-alone corporation with a SMLLC subsidiary. The parent corporation has Texas nexus, but the SMLLC does not, although it has some sales into Texas (falling short of the economic nexus thresholds that go into effect on 10/01/2019).
• Since Texas is a Joyce state, and the SMLLC does not have nexus, you should not include the sales of the SMLLC in the combined Texas receipts factor.
• Many companies overlook this, especially where PTE’s and combined reporting is involved.
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Other PTE Apportionment Issues
Peter Rabinowitz, CohnReznick
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Other PTE Apportionment Issues
• For Illinois purposes, transactions between PTE and its owner are eliminated
– IL DOR Ruling IT 08-0001-PLR (05/19/2008)
• California provides for eliminations
– CA Reg. Sec. 25137-1(f)
• Pennsylvania also eliminates intercompany transactions
– PA Reg. Sec. 153.29
• Oregon provides for elimination between a corporate member and LLCs
– OR Reg. Sec. 150-314-0385(9)
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