What’sHappening

Tuesday

December 18, 2007

Doug LindholmCouncil on State Taxation

Fred MarcusPrincipal, Horwood, Marcus, and Berk, Cht.

Ginny Buckner KisslingPrincipal, Ryan, Inc.

Hosted by

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withwith

Program

Pat Van Tiflin, MichiganBob Sash, IllinoisDavid Shipley, Pennsylvania / New JerseyDale Busacker, MinnesotaFred Nicely, OhioEric Coffill, California

Program

Mark Eidman, TexasJeff Saviano, New EnglandDick Genetilli, New YorkKurt Kawafuchi, HawaiiJack Harper, North Carolina / South Carolina

NEWS BREAKNEWS BREAK

Presented by

&

Marc SimonettiAssociate

Sutherland Asbill & Brennan

Bill TownsendPartner

Fowler White Boggs Banker LLP

SPECIAL GUEST

Mr. Patrick R. Van TiflinPartnerHonigman, Miller, Schwartz and Cohn LLPLansing, Michigan

The Michigan Business Tax• Five Taxes:

– Business Income Tax– Modified Gross Receipts Tax– Gross Premiums Tax– Bank Capital Tax– Small Business Tax

Surcharge• Surcharge 21.99%• Financials 27.7% (’08)

23.4% (after ’08)• Insurance & “Trust” Co’s not taxed• Capped at 6 million

Economic Nexus

• Sec. 200 (1) – Except as otherwise provided in this act or under

subsection (2), a taxpayer has substantial nexus in this state and is subject to the tax imposed under this act if the taxpayer has a physical presence in this state for a period of more than 1 day during the tax year or if the taxpayer actively solicits sales in this state and has gross receipts of $350,000 or more sourced to this state.

Economic Nexus (cont.)

• Sec. 200 (2) – For purposes of this section, “actively solicits” shall

be defined by the department through written guidance that shall be applied prospectively.

Economic Nexus (cont.)

• Sec. 200 (3)– As used in this section, “physical presence” means any

activity conducted by the taxpayer or on behalf of the taxpayer by the taxpayer’s employee, agent, or independent contractor acting in a representative capacity. Physical presence does not include the activities of professionals providing services in a professional capacity or other service providers if the activity is not significantly associated with the taxpayer’s ability to establish and maintain a market in this state.

Unitary Business

• Sec. 117 (6)– Unitary business group means a group of United States

persons, other than a foreign operating entity, 1 of which owns or controls, directly or indirectly, more than 50% of the ownership interest with voting rights or ownership interests that confer comparable rights to voting rights of the other United States persons, and that has business activities or operations which result in a flow of value between or among persons included in the unitary business group or has business activities or operations that are integrated with, are dependent upon, or contribute to each other. For purposes of this subsection, flow of value is determined by reviewing the totality of facts and circumstances of business activities and operation.

Expense Disallowance

• Sec. 201 (2) (f)– Except as otherwise provided under this subdivision, to

the extent deducted in arriving at federal taxable income, add any royalty, interest, or other expense paid to a person related to the taxpayer by ownership or control for the use of an intangible asset if the person is not included in the taxpayer’s unitary business group.

Expense Disallowance (cont.)

• Sec. 201 (2) (f) (cont.)– The addition of any royalty, interest, or other

expense described under this subdivision is not required to be added if the taxpayer can demonstrate that the transaction has a nontax business purpose other than avoidance of this tax, is conducted with arm’s-length pricing and rates and terms as applied in accordance with sections 482 and 1274(d) of the internal revenue code, and satisfies 1 of the following:

Expense Disallowance (cont.)

• Sec. 201 (2) (f) (cont.)– (i) Is a pass through of another transaction between

a third party and the related person with comparable rates and terms.

– (ii) Results in double taxation. For purposes of this subparagraph, double taxation exists if the

transaction is subject to tax in another jurisdiction.– (iii) Is unreasonable as determined by the treasurer, and

the taxpayer agrees that the addition would be unreasonable based on the taxpayer’s facts and circumstances.

Apportionable Income• Sec. 105 (1)

– “Business activity” means a transfer of legal or equitable title to or rental of property, whether real, personal, or mixed, tangible or intangible, or the performance of services, or a combination thereof, made or engaged in, or caused to be made or engaged in, whether in intrastate, interstate, or foreign commerce, with the object of gain, benefit, or advantage, whether direct or indirect, to the taxpayer or to others, but does not include the services rendered by an employee to his or her employer or services as a director of a corporation. Although an activity of a taxpayer may be incidental to another or others of his or her business activities, each activity shall be considered to be business engaged in within the meaning of this act.

Apportionable Income (cont.)

• Sec. 105 (2)– “Business income” means that part of federal taxable

income derived from business activity. For a partnership or S corporation, business income includes payments and items of income and expense that are attributable to business activity of the partnership or S corporation and separately reported to the partners or shareholders… For a tax-exempt person, business income means only that part of federal taxable income derived from unrelated business activity.

Finnigan

• Sec. 303 (2)– Except as otherwise provided under this subsection,

for a taxpayer that is a unitary business group, sales include sales in this state of every person included in the unitary business group without regard to whether the person has nexus in this state. Sales between persons included in a unitary business group must be eliminated in calculating the sales factor.

State Specific Credits

• Sec. 403 (2)– Subject to the limitation in subsection (1), a taxpayer

may claim a credit against the tax imposed by this act equal to 0.370% (.296% in ’08) of the taxpayer’s compensation in this state.

State Specific Credits (cont.)

• Sec. 403 (3)– Subject to the limitation is subsection (1), a taxpayer may claim a

credit against the tax imposed by this act equal to 2.9% (2.32% in ’08) … for the cost, including fabrication and installation, paid or accrued in the taxable year of tangible assets of a type that are, or under the internal revenue code will become, eligible for description, amortization, or accelerated capital cost recovery for federal income tax purposes, provided that the assets are physically located in this state for use in a business activity in this state and are not mobile tangible assets.

• These credits are taken first and together are capped at 50% of tax liability before surcharge in ’08 (52% after ’08).

State Specific Credits (cont.)

• Sec. 405– A taxpayer may claim a credit against the tax

imposed by this act equal to 1.90% (1.52% in ’08) of the taxpayer’s research and development expense (as defined in section 41(b) of the internal revenue code) in this state in the tax year.

• R & D, Comp and ITC cannot exceed 65% of tax liability before surcharge.

Refund Provision

• If 2008 Fiscal Year net cash revenues exceed – Revenue estimate plus .75% times 2008 CPI/2007 CPI

• Then 60% of excess refunded pro rata to taxpayers making net cash payments during fiscal year

• Net cash is annual and estimated payments during fiscal year less refunds

• After 2008, refund bases on R&D, Comp and ITC credits taken

SPECIAL GUEST

Mr. Robert C. SashPartnerDeloitte Tax LLPChicago, Illinois

Illinois Developments

• Mead case to be reviewed by U.S. Supreme Court

• Income and Sales Tax Changes – S.B. 1544 (August 2007)

• Income and Sales Tax Changes – S.B. 783 (????)

• Other Illinois Developments• Future Outlook for Illinois

S.B. 1544 – Enacted August 2007

• Addback for interest, intangible expenses, and insurance premium expenses– Now for entities not in the unitary group due to

different apportionment• Dividends paid deduction for captive REITs

– S.B. 783 would make certain changes to the definition of a captive REIT

S.B. 1544 – Enacted August 2007

• Sourcing changes– Services: move from cost of performance to where the benefit of

the service is realized– Financial organizations: sourcing based on ratio of gross

receipts from Illinois marketplace• Location where interest payments are received no longer relevant

– Transportation (not airline): replace revenue miles with ratio of in-state gross receipts

– Airline services: replace revenue miles with arrivals and departures

– Bifurcation of services

S.B. 1544 – Enacted August 2007• Withholding by Partnerships, S Corporations, and

Trusts– Partnerships, S Corporations, and trusts must withhold Illinois

income tax on distributive shares of their business income apportionable to their nonresident partners, shareholders, or beneficiaries (“Distributee”) at the Distributee’s applicable tax rate.

– Withholding is not required for a nonresident Distributee included on a composite return.

– Withheld amounts are treated as a payment of the Distributee’s estimated Illinois income tax liability.

S.B. 1544 – Enacted August 2007

• Elimination of the Sales Tax Exemption for Vehicles Used for Automobile Renting– Prior law provided a Retailers’ Occupation Tax and

Use Tax exemption for automobiles purchased for use in the business of renting under the Automobile Renting Occupation and Use Tax Act.

– Following S.B. 1544, this exemption was eliminated for the Retailers’ Occupation Tax, but not the Use Tax, effective on the August 16, 2007 enactment date.

S.B. 783

• Sourcing– Rules created for dealers of intangibles and

telecommunication services– Revenue miles apportionment reinstated for airline

services– Requirement for bifurcation of financial,

transportation, and airline services from other services are removed

S.B. 783

• Withholding– Investment partnerships specifically exempt– Withholding is not required when a Distributee issues

the flow-through entity a certificate stating that the Distributee will file and pay Illinois personal income tax and submit to Illinois’ jurisdiction for the purpose of the collection of income taxes.

S.B. 783

• Sales and Use Tax– Restoration of ROT exemption for vehicles used for

automobile renting– Use Tax exemption for Production Related

Tangible Property• The exemption is limited to 5% of the purchase price of

production related tangible personal property purchased during July 1, 2007 and June 30, 2008.

• The maximum aggregate amount of exemptions awarded under this exemption for all taxpayers may not exceed $10,000.000.

Other Illinois Developments

• H.B. 1558• Cook County budget

– Tax increase proposed of $800 million• Total budget of $3.2 billion• Largely funded by sales tax increase from 0.75% to 2.75%

– Substantially derailed by taxpayers• City of Chicago budget

– Tax increase proposed of almost $300 million

Other Illinois Developments

• Illinois Franchise Tax Amnesty Program– S.B. 1544 requires the Secretary of State to

establish a franchise tax amnesty program running from February 1, 2008 to March 15, 2008

– When established, the program will provide for the abatement of interest and penalties for taxpayers that pay in full their franchise taxes and license fees due to the state.

Future Outlook for Illinois

• Still substantially outspending receipts• Substantial needs/wants

– Education funding– Mass transit– Capital program– Universal health care

• Ongoing tinkering (“loophole” closures)• Commercial Club proposal• Constitutional Convention?

What’sHappening

Tuesday

December 18, 2007

NEWS BREAKNEWS BREAK

Pennsylvania/New Jersey Developments

Mr. David ShipleySpecial CounselMcCarter & English LLPPhiladelphia, Pennsylvania

Pennsylvania Procedural Changes Effective 1/1/2008

• Abolished corporate tax “settlement” process• Certified mail requirement for assessments over

$300• Implementation of uniform 90-day administrative

appeal deadlines• Applies to CNI, capital stock/franchise, sales and

use and realty transfer taxes• Old rules applies to corporate taxes “settled”

prior to 1/1/2008

Pennsylvania Taxation of Computer Software• Panel of Commonwealth Court held in Graham

Packaging that “All canned software…is taxable as the sale of tangible personal property.”

• In the Dechert appeal, another panel followed that decision

• Dechert appeal was argued before the Commonwealth Court en banc and we are awaiting a decision

Pennsylvania Treatment of Intangible Holding Companies

• Department has made repeated statements that in-state use of intangibles does not result in nexus

• However, Department has issued assessments denying royalty deductions based on a “sham” theory

• Assessments that have been appealed to Commonwealth Court have been settled

Pennsylvania 2008 Predictions

• Decision in Dechert case and appeal to Pennsylvania Supreme Court

• New apportionment regulation on cost of performance

• No significant legislative changes (e.g. unitary, add-backs, tax court)

• Philadelphia will continue to harass taxpayers on nexus issues

New Jersey’s Throwout Rule

• Four Cases: Pfizer, General Engines, Westinghouse Properties and Federated Brands

• Summary judgment motions filed on facial constitutionality

• All briefs have been filed and oral argument will be in early 2008

New Jersey Treatment of Intangible Holding Companies

• Certiorari denied in Lanco• No formal program but October 12, 2007 memo

outlines Division’s position• Returns must be filed beginning in 1996 based on

promulgation of nexus regulation• Related entities get exception to royalty addback

provision for open years• Primary issues are throwout and penalties

Interesting New Jersey Cases

• CSX Transportation (Apportionment)• Praxair Technology (Penalties)• McKesson Water Products Company (Non-

operational Income)• Tozour Energy Systems (Sales Tax)• Jean-Georges (Filing Deadlines)

New Jersey 2008 Predictions

• Throwout cases• Amnesty penalty cases• Intangible and interest addback cases• Section 482 type audits• Increased collection activities• Taxpayer friendly tax law changes?• Unitary combined reporting or gross receipts

tax?

Minnesota Developments

Mr. Dale BusackerDirector, State and Local TaxesGrant Thornton LLPMinneapolis, Minnesota

What happened in 2007?• Tax bill was vetoed – May 30th

• 9% Individual Income Tax rate - vetoed

• I-35W bridge collapsed• Sales factor went from 75% to 78% and to 81% in 2008• Proposed rule would impose sales tax on transfers to a

SMLLC• Streamlined – not in compliance• More tax auditors approved

Foreign Operating Corporation• Law changes agreed to in 2007 – probable in

2008• 80% of income must be from foreign sources• Addback for payments made to FOC for interest,

royalties, factoring, or for DPD from a captive REIT.

• Economic substance– Grant of authority to Revenue Department– Provision not contained in 2007 tax bill

HMN Financial – Pending in Tax CourtMinnesota bank owns an FOC which owns a REIT. The bank contributed one-third of its Minnesota mortgage loan portfolio to the REIT. Bank dismantled structure within two months after law was changed in 2005.

Department’s Position:1. Transfer of the loan portfolio to the REIT lacked

economic substance.2. Payroll with the bank needs to be imputed to the FOC.3. The bank never acted on its business purpose for the

REIT or for the FOC.

BNSF Railway – Pending in Tax CourtBNSF Railway owed about $5.5 billion to two of its subsidiaries located in Canada and which were FOCs. The Department admits that these two companies qualify as FOCs.

Department’s Position:1. The interest payments lack economic substance and

business purpose.2. No business purpose or economic substance to

capitalize these FOCs with more than $5 billion in intercompany notes.

Challenge to JOBZ• Olson Case

– October 9, 2006 – District Court said taxpayers lack standing

– September 25, 2007 – Appeals Court hears case• Interstate Motor Trucks

– Filed by businesses who claim that they directly compete with businesses who receive benefits under JOBZ.

– Plaintiffs allege a loss of business.

FEATURING SPECIAL GUESTS:

Mr. Richard GenetelliThe Genetelli Consulting Group

New York, New York

Mr. Kurt KawafuchiDirector

Hawaii Department of TaxationHonolulu, Hawaii

Mr. Jack HarperVice President, Corporate Tax

Wachovia CorporationCharlotte, North Carolina

WITH DOUG LINDHOLM

MEETTHE

PRESS

NEWS BREAKNEWS BREAK

Ohio Developments

Mr. Fred NicelyTax CounselCouncil On State TaxationWashington, DC

Have I left or joined the Dark Side?Have I seen the light or just turned them off?

Santa’s giving me gold or a lump of coal?

Ohio’s Tax Reform

• It’s all about jobs/economy and reducing cost to do business in the state (tax on capital investments)

• Accomplished by (for most businesses):– Eliminating Tangible Personal Property Tax ($1.6 B)– Eliminating Corporation Franchise Tax ($.9 B)– Reducing Income Tax Rates (7.5% to 5.9% - $2 B)– Imposing Broad-based Gross Receipts Tax (CAT -

$1.7 B)

Ohio’s Economy

• From the U.S. Census – Ohio Employment growth from 2000 to 2005 was a negative 4.8% while the U.S. average was a 2% gain

• Per the Brookings Institution, Ohio was 2nd highest loser of manufacturing jobs (only Michigan was worse)

• Post tax reform, Ohio tax burden still rated high (5th) by the Tax Foundation

• Ohio State is ranked #1 in NCAA Football

CAT Issues Versus

• Ohio Constitutional Issues– Tax on Motor Fuel used on the public highways– Tax on food (off-premise and wholesale)– Elimination of 10% roll-back on real property

• Apportionment of Services (reasonable test)• U.S. Constitutional Issues

– MTC Nexus Standard ($500K in sitused sales)– Apportionment issue v. allocation

• Will the tax base stay broad and the rate low?

Qualified Distribution Center (QDC)

• Originally the CAT had a carve-out for businesses w/one mile around an airport in Ohio (Rickenbacker) to address wholesale operations occurring on that site

• Replaced with QDC– Allows a seller to a QDC a partial exemption on the CAT

based on the percentage of the goods shipped out of Ohio by the QDC (not per product)

– Two approved QDCs for calendar year 2008• Cardinal Health Logistics Center – Groveport, OH – 6.883%• McKesson – Washington Court House, OH – 36.6825%

Other Ohio Tax Issues

• Post Cuno Manufacturing Credit/Grant– Can lessors of manufacturing equipment claim the

credit/grant– Can service companies using manufacturing equipment

claim the credit/grant• Property tax

– New manufacturing machinery immediately exempt from all property tax if in a “manufacturing facility”

– What’s real and what’s personal property – “business fixture” and what benefits the business v. the land

What’sHappening

Tuesday

December 18, 2007

2007 CALIFORNIA DEVELOPMENTS

Mr. Eric CoffillPartnerMorrison & Foerster LLPSacramento, California

NEWS AT THE SBE New Rules for Tax Appeals

Barnesandnoble.com LLC v. SBE

NEWS AT THE FTB

Regulations under Consideration• Telecommunication• Air Transportation and Air/Trucking• Motion Picture/Television• Print Media• MTC Reg. IV.17 OTPP SalesNew Chief Counsel – Geoff Way

FTB COURT ACTION

Section 19777.5 Amnesty Interest Penalty• FTB Protective Refund Policy• 4 Cases in Court

FTB COURT ACTION (cont.)Gross Receipts Cases• New FTB Regulation?• General Motors• Toys “R” Us• Colgate-Palmolive• Montgomery Ward• General Mills• Home Depot at the SBE

LLC Fee Cases

Legislative Session

• No “Tax Package”• No Conformity Bill• LLC Fee – AB 198• Water’s Edge Return Review – SB 306• Interest Offset 24344 Bill Vetoed – AB 1618

NEWS BREAKNEWS BREAK

SPECIAL GUEST

Mr. Mark W. EidmanPartnerScott, Douglass & McConnico, LLPAustin, Texas

Texas Administrative Changes

• Tax Hearings transferred to SOAH.• New Rules of Practice and Procedure.• New Policy on Letter Rulings.

Transfer to SOAH

• Administrative Law Judges presiding over tax hearings are now employees of SOAH.

• Cases are not transferred to SOAH until after initial briefing phase is concluded and parties cannot reach an agreement.

• SOAH ALJs will submit proposed hearings decisions, but the Comptroller issues all final orders, and the Comptroller can change findings of fact or conclusions of law made by the ALJ or vacate or modify an order made by the ALJ.

New Procedural Rules

• Rule 1.15 imposes stricter evidentiary requirements for Reply to Position Letter.

• SOAH discovery rules apply before and after transfer to SOAH.

• Discovery deadlines changed from 30 day to 20 day system.

• No “mailbox rule” for filings with SOAH or service on Tax Division.

New Policy on Letter Rulings

• Taxpayer can no longer withdraw ruling request to avoid negative ruling.

• Negative ruling could be used as precedent against taxpayer in subsequent hearing.

Margin Tax• Current franchise tax replaced by a “margin” tax.• Margin tax is basically a modified gross receipts

tax.• More entities are subject to margin tax than old

franchise tax.• Margin tax requires combined unitary reporting.

Taxable Entities

• “Taxable entity” defined broadly to include any kind of incorporated or unincorporated business entity.

• Excluded entities include sole proprietorships, general partnerships owned by natural persons, certain family partnerships, certain REITs, and certain passive entities.

• Other exempt entities under the franchise tax, such as nonprofit religious entities, retain their specific exemptions.

Combined Reporting• Unlike old franchise tax, margin tax provides for

requires combined reporting for all members of an affiliated group engaged in a unitary business.

• “Affiliated group” means a group of one or more entities in which a controlling interest is owned by a common owner or owners, either corporate or non-corporate, or by one or more of the member entities.

Taxable Margin

• Taxable margin is the lesser of 70% of apportioned total revenue from the entire business, or apportioned total revenue from the entire business less either cost of goods sold or compensation.

• Every entity gets at least a 30% deduction.• If there is combined reporting, the combined

entity must make a single election.

Tax Rate• Base rate is 1% of taxable margin.• Rate is 0.5% for entities with 50% or more of

their revenues from the retail or wholesale trade.

• “Goods” are defined as real and tangible personal property perceptible to the senses, creative works likely to be distributed to third parties by tangible medium, and computer programs.

• Statute includes non-exclusive laundry list of allowable and nonallowable costs.

Cost of Goods Sold

Compensation• Includes “wages and cash compensation” and

benefits such as health, workers compensation, and retirement.

• $300,000 per person cap on deductible wages and compensation.

• Cap adjusted by consumer price index.

Apportionment• Essentially uses the current system based on the

ratio of Texas gross receipts to everywhere gross receipts.

• Statute eliminates throwback provision for goods shipped to states where entity is not subject to taxation.

Effective Date• Margin tax is effective January 1, 2008.• Same reporting period as current franchise tax.• For privilege of doing business in 2008, existing

companies will pay tax based on margin calculated for the fiscal year ending in 2007.

Home Interiors & Gifts v. Strayhorn• Austin Court of Appeals held that the interplay between earned

surplus throwback provision and Public Law 86-272 could result in an interstate corporation being subject to a franchise tax based on its net taxable earned surplus in Texas and franchise taxes based on its net taxable capital in all other states.

• Under this scenario, interstate corporation would incur tax that intrastate corporation would never bear, making the franchise tax internally inconsistent in violation of the Complete Auto fair apportionment requirement.

• Texas Supreme Court denied petitioner for review.

El Paso Natural Gas v. Strayhorn• Texarkana Court of Appeals held that if the

parties waive the filing of a motion for rehearing, the administrative proceeding becomes immediately final and the clock starts to run for limitations.

• The Court also held that the six-month extension of time for refund claims following a deficiency determination (Tax Code section 111.104(c)) applies only to issues in the redetermination.

INOVA Diagnostics v. Strayhorn• The Austin Court of Appeals held that the taxable

capital component of the Texas franchise tax is not a tax measured by net income, so the protections of Public Law 86-272 do not apply.

• The nexus standards of Quill Corp. v. North Dakota apply to the Texas franchise tax.

• Texas residents spending seven to ten days per month soliciting orders in Texas was not de minimis.

Metromedia v. Strayhorn• Case involved requirement to be a “holder” under the Texas unclaimed

property statutes.• Trial court entered $500,000 judgment for failure to remit unclaimed

employee wages against Metromedia Restaurant Services and two related companies who were not parties to lawsuit. Court’s judgment against non-parties was based on jury finding that companies operated as a “single business enterprise” with Metromedia.

• Austin Court of Appeals reversed, holding that due process does not allow a judgment to be granted against a party not named in the lawsuit.

• Court also held that Metromedia was not a “holder” of the property as required by Chapter 72 of the Texas Property Code. For Metromedia to be a holder, the Comptroller had to show Metromedia was either in possession of the retained funds or was obligated to the employees to pay the wages.

Strayhorn v. Chevron USA

• Refund suit to recover sales and use tax paid on charges for erecting, maintaining, and dismantling scaffolding.

• Taxpayer contended charges were for nontaxable services; Comptroller contended transactions were taxable leases of tangible personal property.

• Trial court rendered judgment for taxpayer, and Comptroller appealed.

• Trial court also ruled that issue raised for the first time in motion for rehearing could be appealed to district court.

Southwestern Bell v. Strayhorn

• Refund suit to recover sales tax paid on purchases of equipment and electricity used to convert, transmit, and reproduce sound and information.

• Taxpayer contends the equipment qualifies for the manufacturing exemption because it is used to process tangible personal property.

• Taxpayer also contends that its purchases of electricity qualify for the resale exemption because the electricity was resold as an integral part of other tangible personal property or because it was used to perform a taxable telecommunications service and taxpayer transferred care, custody, and control of electricity to its customers.

What’sHappening

Tuesday

December 18, 2007

SPECIAL GUEST

Mr. Jeffrey SavianoNortheast Director of State and Local TaxErnst & Young LLPNew York, New York / Boston, Massachusetts

Massachusetts Update – Proposed Legislation

• Adoption of Unitary Reporting– Unitary group would include affiliates with 50% or more

common ownership. Unitary activities would be defined to the fullest extent possible under the US Constitution.

– Finnegan approach would be applied in unitary apportionment.– Unitary group would include C corporations, S corporations,

utility corporations, financial institutions and captive insurance companies. Foreign affiliates with more than 80% of payroll and property outside the US would be excluded so long as the taxpayer agrees to report all federal 482 adjustments to Massachusetts.

– This proposal is now being studied by an appointed commission.

• State/Federal Entity Classification Conformity– MA would adopt federal check-the-box rules (currently

applicable only to LLCs)– MBTs and partnerships would be taxed according to

their federal classification– If classified as corporations, check-the-box entities

would be subject to all aspects of the corporate excise tax.

Massachusetts Update – Proposed Legislation (cont.)

Massachusetts Update – Study Commission on Corporate Taxation• Commission empanelled in April 2007• Composition includes representatives of government,

industry and tax practitioners• Interim report issued June 15, 2007

– Acknowledges historical erosion of corporate excise tax base.– Recommends adoption of state/federal entity classification

conformity (by a 7-6 vote).– Comments favorably on unitary filing but states that further

study is needed.• The final report is due by January 1, 2008. Legislation is

likely on hold until the report is issued.

Massachusetts – Significant Cases• Capital One Bank et. al. v. Comm’r of Rev., Dkt. Nos.

C262391 & C262598 (Mass. App. Tax Bd. June 22, 2007)– ATB held out-of-state credit card banks’ activities in

Massachusetts created substantial nexus for purposes of imposing the Financial Institution Excise Tax, even though the banks were not physically present in Massachusetts during the tax years at issue.

– Similar to the Geoffrey-line of cases, the ATB held that the use of the banks’ intangible personal property (trademark on credit cards) within the Massachusetts market generated substantial revenue resulting in substantial nexus in Massachusetts.

Massachusetts – Significant Cases• Geoffrey, Inc. v. Comm’r of Rev., No. C271816 (Mass.

App. Tax Bd. July 24, 2007)– ATB held that an out-of-state intangible holding company that

does not have a physical presence in Massachusetts has substantial nexus with Massachusetts because “it purposefully sought to reap economic benefit from the Massachusetts retail marketplace by licensing its assets for use in Massachusetts by [related entities]”.

– The ATB found it compelling that Geoffrey received substantial royalty income over the years at issue, which represented its realization of economic benefits from Massachusetts.

Massachusetts – Significant Cases• The TJX Companies, Inc. v. Comm’r of Rev., Dkt. Nos.

C262229-31 (Mass. App. Tax Bd. Aug. 15, 2007)– The ATB concluded that a company that transferred its

trademarks and service marks to related Nevada intangible holding companies that in turn licensed the marks back to the company was liable for additional corporation excise tax because the transfer and license-back arrangements constituted a sham transaction in that these transactions had no business purpose and lacked economic substance. The ATB found that the fundamental objective of the transfer was to obtain royalty and interest deductions for the company, tax-free income to its subsidiaries and a tax-free return of the royalties to the company.

What’sHappening

Tuesday

December 18, 2007

FEATURING SPECIAL GUESTS:

Mr. Richard GenetelliThe Genetelli Consulting Group

New York, New York

Mr. Kurt KawafuchiDirector

Hawaii Department of TaxationHonolulu, Hawaii

Mr. Jack HarperVice President, Corporate Tax

Wachovia CorporationCharlotte, North Carolina

WITH DOUG LINDHOLM

MEETTHE

PRESS

NEW YORK DEVELOPMENTS

Mr. Richard W. GenetelliPresident, The Genetelli Consulting GroupNew York, New York

• New combined reporting rules in New York State– 10-step process to determine companies to be

included in a combined group– Key – substantial intercorporate transactions

• Intercorporate receipts• Intercorporate expenditures• Intercorporate asset transfers

Combined Reporting Developments

Combined Reporting Developments• What is New York City’s position in light of new

combined reporting rules in New York State?• Significant audit activity

– Forced combination– De-combination

• Planning strategies

Withholding Tax Audit Initiative• Hot Issues

– Bright-line standard – 14 day rule– Audit Enforcement

• Implications of Form IT 2104.1• Potential penalty for noncompliance

Withholding Tax Audit Initiative• Planning strategies

– Assess prior exposure• Alternative strategies

– Future implications• Procedural issues

Personal Income Tax Developments• Significant audit activity

– Residency• Domicile• Statutory Resident – day count issue

– “Convenience of the employer”• New York State issued a TSB-M which sets forth

application of this test to telecommuters– Planning opportunities

Investment Capital• Significant planning opportunity

– Minimize tax on investments• Cash election

• Audit Initiatives– Focus on financial services industry

• New York State issued proposed regulation• New York City issued a position paper

– Mix of investment capital and cash• Barney’s/Forbes

Attribution of Expenses to Subsidiaryand Investment Capital

• Significant audit activity– Potential implications to all taxpayers

• Planning opportunities– Direct tracing

• Suburban Carting– Combined reporting

HAWAII DEVELOPMENTS

Mr. Kurt KawafuchiDirectorHawaii Department of TaxationHonolulu, Hawaii

• Elimination of “pay-to-play”• Enactment of “Deemed Denial” on

Refunds• Clarification of “Service” Requirement

for Tax Appeals

Tax Practice & Procedure

• Litigation:– Subway Real Estate Corp. v. Kawafuchi– In Re Tax Appeal of Baker & Taylor, Inc.– In Re Tax Appeal of Director of Taxation v. Medical

Underwriters of California

General Excise & Use Tax Admin.

• Statutory & Regulatory Developments– Honolulu County Surcharge– County Surcharge Sourcing Rules

General Excise & Use Tax Admin.

• Income Tax Litigation – REITs• Income Tax Incentives

– Act 221/215 – High Tech Business ITC & Economic Substance Enforcement

– Act 221/215 – 20% Refundable R&D Credit– 15%-20% Motion Picture, Digital Media, and Film

Production Tax Credit

Income Tax Administration

• Hawaii Department of Taxation Contact Information– Kurt Kawafuchi, Director– Kurt.k.kawafuchi@hawaii.gov– 808.587.1513

Income Tax Administration

North Carolina/South Carolina Developments

Mr. Jack HarperVice President, Corporate TaxWachovia CorporationCharlotte, North Carolina

Wal-Mart Stores East v. Tolson, 06 CVS 3938 Sam’s East v. Tolson, 06 CVS 3929

• North Carolina Department of Revenue forced combination of Stores, REIT Holding Company and REIT

• Disallowed REIT’s dividends paid deduction and REIT Holding Company DRD

• Wal-Mart sues for refund• Wall Street Journal Coverage• Motion to seal future discoverable documents from

public view

North Carolina – New Administrative Tax Appeals Process

1. Request for Review2. Informal Conference3. Notice of Final Determination4. Pre-Hearing Remedies Followed5. Administrative Law Judge (Office of

Administrative Hearings)6. ALJ Issues – “Recommended Decision”

North Carolina – New Administrative Tax Appeals Process

7. Secretary of Revenue issues – “Final Decision”8. Pay the Tax, Interest and Penalties9. Petition Wake County Superior Court10. Mandatory Complex Business Cases –

Business Court11. Appeal – North Carolina Court of Appeals12. Appeal – North Carolina Supreme Court

North Carolina Legislative and Administrative Highlights• REIT dividends paid deduction for captive REITs

disallowed• Secretary of Revenue authorized to grant alternative

apportionment relief• Scope of audit adjustment limited for amended returns

filed to report “federal determinations”• Corporate tax return filing deadline changed to April 15th

instead of March 15th

• Penalty Waiver Policy revised

What’s Ahead in North Carolina

• Combined Reporting• Corporate Income Tax Rate Reduction• Revamped Franchise Tax• Limited Sales Tax of Services• Continued Tax Incentives• Repeal Existing Estate and Gift Tax

Key South Carolina Developments• Phase-in Single Sales Factor

– 2007 20% of Reduction Allowed– 2008 40%– 2009 60%– 2010 80%– 2011 single sales factor fully phased in

• Sales to US Government excluded from sales factor• Examples of “Sales” and “Gross Receipts” codified in statute• S.C. Rev. Proc. #06-2 issued – Procedures for Handling Tax

Disputes

What’sHappening

Friday

December 18, 2007

Holiday Greetings!

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