market-based sourcing uniformity project continues

The Multistate Tax Commission (MTC) UDITPA Section 17 Work Group recently released its Working Draft Model for Market-Sourcing Regulations. 

States who have recently adopted market-based sourcing have similar guidelines. The goal is to develop uniformity for current and future states that enact market-based sourcing for determining the sourcing of sales of services, intangible property and other non-tangible personal property for multistate income tax apportionment purposes. 

The Working Draft provides insight into where the MTC is going and how complicated market-based sourcing really is. The support for switching to market-based sourcing from the costs-of-performance method is partially based on the claim that it is easier to implement. I think the 44-page document speaks for itself.

Check out the Working Draft and my previous posts regarding market-based sourcing for more information.

2015 state tax amnesty programs - should your company apply?

Is amnesty the way forward? Does your company have past liabilities that need paid without paying penalties or interest? Should your company participate in a state's amnesty program or utilize the state's Voluntary Disclosure Program?

These questions plague companies when faced with identified compliance exposure and failures for multiple tax years. Some states offer one-time, short time-frame amnesty periods allowing companies to come forward, file prior year tax returns, and pay tax with the promise of future compliance. Depending on the specifics of the state's amnesty program, penalties and/or interest may be abated.

Key to remember: if your company has exposure and does not come forward, then the state may assess more significant penalties and interest when it finds your company later.

The Council on State Taxation (COST) has put together a great matrix of 2015 state tax amnesty programs. Check it out here.

Also, if you would like to read more about amnesty, check out my previous posts here.

Specifically, you may like: Amnesty and Voluntary Disclosure Agreements: What, When, Why?

How to request alternative apportionment in South Carolina

On June 1, 2015, the South Carolina Department of Revenue published Revenue Procedure 15-2. The purpose of the Revenue Procedure is to provide a procedure for a taxpayer to request use of an alternative apportionment method if the taxpayer believes that the prescribed statutory formula does not fairly represent the extent of the taxpayer’s business activities in South Carolina. This request is an “Application for an Alternative Apportionment Method under Code Section 12-6- 2320(A).” 

South Carolina also released Revenue Ruling 15-5. The Revenue Ruling addresses some of the issues that may arise when South Carolina requires or a taxpayer requests an alternative allocation or apportionment method, including combined unitary reporting. Noted in the Ruling is that the Department may require and a taxpayer may request combined unitary reporting as an alternative method, if reasonable. Combined reporting can be used to effectuate equitable apportionment of the taxpayer’s income when separate entity reporting does not fairly represent the taxpayer’s business activity in South Carolina. If the Department requires combined reporting, the Department will apply the Finnigan method to apportion the unitary income using a two-step process (as described in the ruling).

For prior posts on South Carolina and alternative apportionment, including the recent South Carolina Supreme Court Case, click here.

Nevada enacts 'commerce tax'

Nevada has signed into law (SB 483) the imposition of a new 'commerce tax' on each business entity engaged in business in Nevada whose gross revenue in a fiscal year exceeds $4 million. 

The Nevada gross revenue is determined by taking gross revenue and making specific adjustments.

Note: there is no adjustment for cost of goods sold.

Revenue is sitused to Nevada differently depending on the source of revenue (i.e., tangible property, real property, services, etc.).

Note: Services are sitused using market-based sourcing methodology (i.e., where the purchaser receives the benefit of the service).

The tax rate will vary based on the industry of the taxpayer.

The tax year begins July 1, 2015 and the first report is due 45 days following June 30, 2016.

Bottom Line

Taxpayers are now subject to a new tax in Nevada, similar to Texas' gross receipts tax, Washington's Business & Occupation Tax or Ohio's Commercial Activity Tax, but with deviation.

Taxpayers must prepare to comply, budget and navigate this new tax (burden).

the usual suspects rise again: economic nexus, combined reporting, market-based sourcing

State legislatures and governors continued to move in the same direction this week - economic nexus, combined reporting, and market-based sourcing. The usual suspects popped up everywhere.

1. Tennessee enacted the "Revenue Modernization Act" (HB 644 and HB 291) - implementing economic nexus (effective for tax years beginning on or after January 1, 2016), and market-based sourcing (applicable to tax years beginning on or after July 1, 2016); the bills also make changes to the affiliated intangible expense addback (applicable to tax years beginning on or after July 1, 2016) and impose a new use tax on cloud computing starting July 1, 2015.
2. Tennessee Supreme Court heard oral arguments in the alternative apportionment Vodafone case (see prior posts for details). The case may be impacted by the Revenue Modernization Act's enactment of market-based sourcing.
3. Connecticut Senate proposed mandatory combined reporting (HB 7061). General Electric and Aetna, Inc. publicly communicated their disapproval by stating they would actually consider moving their operations out of state if the bill is signed by the Governor.
4. Virginia workgroup met to discuss enacting market-based sourcing.
5. Maryland Tax Court continued to use unitary principle to establish nexus (Staples Inc. v. Comptroller).
6. California Court of Appeals held that allowing only intrastate unitary taxpayers to make a separate or combined filing election was discriminatory (Harley-Davidson, Inc. v. Franchise Tax Board).
7. New York Tax Appeals Tribunal reversed an administrative law judge's determination and decided that affiliated corporations were entitled to file on a combined basis (SunGard Capital Corp).

does state sovereignty allow states to overreach?

"Substantial nexus," "economic nexus," "physical presence nexus" - who will win?

Federalism and state sovereignty - are they in conflict or can they work in concert?

"Substantial nexus" used to mean a seller had to have a physical presence in a state before they were subject to taxation. Now, more and more states are leaning on economic nexus standards which essentially say a seller can be subject to tax simply if they have customers in a state or direct some type of activity towards the state to create or maintain a market (vague, I know). Some states have taken it a step further (to make it less vague), and have instituted "factor presence" nexus standards which simply provide 'bright-line' thresholds. Meaning, these states maintain that a seller is subject to tax in their states if the seller has a specific amount of sales, property or payroll in their state. For example, the thresholds may be $50,000 of property, $50,000 of payroll or $500,000 of sales. Some state thresholds are lower for sales, such as $350,000 in Michigan or $250,000 in Washington. Regardless of the threshold limit, factor presence nexus standards and economic nexus is the trend as states look to maintain services and their budgets while imposing tax on non-voters (out-of-state taxpayers).

This discussion regarding nexus standards and the ability of the federal government to create legislation to 'big brother' the states was the subject of the June 2, 2015 Hearing before the U.S. House Subcommittee on Regulatory Reform, Commercial and Antitrust Law. Several government officials and interested parties presented testimony either for or against the 3 pieces of federal legislation currently under review:

1. The Mobile Workforce State Income Tax Simplification Act of 2015 (HR 2315)
2. The Digital Goods and Services Tax Fairness Act of 2015 (HR 1643)
3. The Business Activity Tax Simplification Act of 2015 (HR 2584)

The title to this post insinuates that states are using economic nexus to reach (or overreach) beyond their borders and tax out of state companies based on standards that are arguably unconstitutional. Regardless of that debate and regardless of which side of the fence you stand, states do have the right to determine 'how' and 'who' they tax inside their state as long as they stay with the boundaries of the U.S. Constitution and other applicable federal laws, such as P.L. 86-272. Companies and individuals have the right to conduct business across state lines without concern that they will be subject to tax when their activities are de minimus or do not reach significant (substantial) levels. Otherwise, the burden on interstate commerce is unnecessary and misplaced.

States argue that taxpayers will avoid (evade) paying taxes if the nexus standard or threshold is too high. However, states should only be able to tax what they legally can tax. Then they should seek to adjust their rules to tax who they can tax. Consequently, avoiding taxes that taxpayers shouldn't have to pay in the first place, really isn't evasion.

The states keep wanting to change their rules so they can tax more taxpayers because the economy changes (i.e., impact of Internet, remote sellers, service companies). Fine, change your rules, just don't exceed your authority and taxpayers will comply. Taxpayers deserve clarity, and to be treated within the boundaries of the law (both federal and state), so they can function and operate effectively in what is already a multi-jurisdictional, non-uniform, complex playing field.