Update: Nevada Commerce Tax

Nevada recently published a Commerce Tax Registration Process Informational Chart. It is a flow-chart that can help your corporation determine if they need to register.

If your corporation is organized or incorporated in Nevada, it will be registered automatically. All other corporations should make the determination based on answering a nexus questionnaire. 

At the end of March, beginning of April, corporations will receive a "Welcome to Commerce Tax" letter (how nice). The letter will have your corporation's Tax ID number on it. Go to the chart for additional details.

Also, check out Nevada's website or my previous posts on the Nevada Commerce Tax.

UPDATE: North Carolina Publishes Guidelines for Market-Based Sourcing 2015 Filing Requirement

As an update to yesterday's post regarding North Carolina's market-based sourcing information reporting requirement, North Carolina has published guidelines.

1. Introduction and Summary - Guidelines for Market-Based Sourcing
2. Guidelines for Computing the Sales Factor Based on Market-Based Sourcing

North Carolina Imposes Additional Filing Requirement on Corporations for 2015

In September, 2015, the Governor of North Carolina signed HB 97. HB 97 made several changes to North Carolina tax law such as phasing-in single-sales factor apportionment. However, the one key change I want to bring to your attention is the "informational reporting requirement" that North Carolina is imposing on corporations (see Section 32.14 of HB 97).

HB 97 directs the Revenue Laws Study Committee to study the calculation of the sales factor using market‑based sourcing. To help the Committee determine the effect of market‑based sourcing on corporate taxpayers, each corporate taxpayer with apportionable income greater than ten million dollars ($10,000,000) and a North Carolina apportionment percentage less than one hundred percent (100%) is required to file an informational report with the Department of Revenue as part of its 2015 income tax return.

What Is Required to Be Reported?

The report is required to show the calculation of the taxable year 2014 sales factor using market‑based sourcing. 

The informational report must contain the following information:

• The corporation's 2014 apportionment percentage used on the corporation's 2014 North Carolina corporate tax return.
• The corporation's 2014 apportionment percentage as calculated using market-based sourcing.
• The corporation's primary industry code under NAICS. 
• Any other information prescribed by the Secretary.

How is Market-Based Sourcing Calculated?

In general terms, the sales factor calculation is based on the model market‑sourcing regulations drafted by the Multi‑State Tax Commission. 

Specifically:

• The sale, rental, lease, or license of real property is sourced to North Carolina if it is located in North Carolina.
• The rental, lease, or license of tangible personal property is sourced to North Carolina if it is located in this State.
• Services are sourced to North Carolina if the service is delivered to a location in North Carolina.
• Intangible property that is rented, leased, or licensed is sourced to North Carolina if it is used in North Carolina. Intangible property utilized in marketing a good or service to a consumer is "used in this State" if that good or service is purchased by a consumer who is in North Carolina.  A contract right, government license, or similar intangible property that authorizes the holder to conduct a business activity in a specific geographic area is "used in this State" if the geographic area includes all or part of North Carolina.
• Receipts from intangible property sales that are contingent on the productivity, use, or disposition of the intangible property are treated as receipts from the rental, lease, or licensing of the intangible property. All other receipts from a sale of intangible property are excluded from the numerator and denominator of the sales factor.

When Is It Due?

The informational report is due at the time corporate taxpayer's return is due for the 2015 taxable year. No extensions. 

What If I Don't Comply?

North Carolina can assess a $5,000 penalty for failure to timely file an informational report.

Form

Here is a link to the form, Form CD-400MS.  

Problems With This Requirement?

North Carolina should not impose a penalty for non-filing. I know North Carolina needs an incentive to make taxpayers comply, but a $5,000 penalty (or 'stick') is not the way to do it. North Carolina could offer a 'carrot' instead. Perhaps a credit or something similar could be offered.

Taxpayers should be able to obtain an extension for filing the form. If the taxpayer extends its 2015 return, it should not be forced to file Form CD-400MS earlier. This creates an extra compliance burden on taxpayers that just isn't necessary.

Sidebar: All information reporting requirements like this one, remind me of the Maryland combined reporting information requirement 'debacle' a few years ago. 

What do you think?

Delaware Enacts Single-Sales Factor Apportionment

The Governor of Delaware signed "The Delaware Competes Act" (HB 235) into law on January 27, 2016 (press release). 

The summary of the Act states that "the principal change in the Act is to remove disincentives for companies to create Delaware jobs and invest in Delaware property that currently exists in how income is apportioned to Delaware for purposes of the corporate income tax." The Act attempts to accomplish this goal by changing Delaware's apportionment formula from a three-factor formula (property, payroll, sales) to a single-sales factor formula.

Phase-In for Most

The change to the single-sales factor apportionment will be phased-in by first doubling the weight on the sales factor in tax year 2017, and then gradually relying exclusively on the sales factor beginning in 2020 (i.e., triple-weighted sales factor in 2018, six-times-weighted sales factor in 2019, single-sales factor in 2020). Corporations organized under the laws of foreign countries that do business in the United States may not dilute their property and payroll factors by including property and payroll that is located outside of the United States in the denominator of these fractions.

Starting in 2017

Despite the phase-in for most corporations, starting in 2017, telecommunications corporations and corporations with their worldwide headquarters located in Delaware that make capital investment in those facilities may use either single sales factors or equally weighted, three-factor apportionment.

Other Changes

The Act also simplifies business tax compliance for smaller businesses by reducing tax payment and filing burdens. For example, the Act doubles the thresholds at which businesses have to make monthly gross receipts tax and withholding filings, enabling hundreds of Delaware businesses to file quarterly instead. The Act also provides that filing thresholds and tax calculations will be indexed for inflation, which locks-in the simplification and efficiency gains for future taxpayers.

The Act attempts to simplify compliance for smaller business. Currently, all corporations must pay 50% of their estimated tax liability for the first quarter of their taxable year, followed by payments of 20%, 20% and 10% in each of their second through fourth quarters. The Act allows smaller businesses with receipts of less than $20 million to make use of a simpler, evenly-weighted (25% per quarter) schedule. Further, the Act updates the calculation for the penalty for underpayment of estimated tax, which has not changed in more than 30 years.

Is Your Auditor M.I.A.?

Where is the auditor? I haven't heard from him or her in a while.

Should I call them? Or should I just wait it out, and see if they contact me again?

Have you ever asked yourself those questions?

Some taxpayers have an audit begin where the auditors come to their place of business, ask questions, review records, and then leave. When the auditors leave, they say they will let the taxpayer know if additional information is needed or if they have any questions.

Then, months go by without any contact from the auditor.

But wait, three weeks before the statute of limitations is about to expire on one of the tax years within the audit period, the state contacts the taxpayer and asks the taxpayer to sign a waiver of the statute of limitations, usually a year extension (you should attempt to negotiate a smaller extension; some states have a minimum of 6 months).

After the extension is signed, the taxpayer may receive another information request or list of questions from the auditor, with a short timeline or due date for the taxpayer to respond. After the taxpayer responds, another 6 months go by without any contact from the auditor.

Then, once again, one month before the statute of limitations is about to expire, the taxpayer receives a preliminary audit assessment. This time the state won't extend the statute, and the taxpayer has less than a month to dispute the audit assessment's findings before a final assessment is received.

QUESTIONS
If your auditor goes M.I.A. in the middle of an audit, what should you do?

Should you just play the "wait and see game"? Or should you contact the auditor sooner to find out what the status is?

If you contact the auditor sooner, you may or may not receive a response earlier? It really could go either way.

The same is true if you don't contact the auditor. You could get "lucky" and the statute of limitations could expire without receiving an assessment. On the other hand, you could receive an audit assessment with a short amount of time to respond.

What do you think? Have you experienced this?

2016 State Tax Amnesty Programs

The Council on State Taxation (COST) has released a chart reflecting state tax amnesty programs scheduled to occur in 2016. Here's the link.

If you are curious as to what states had amnesty programs in 2015, go here. 

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.

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?