New Year, New Legislative Sessions and the MTC

I hope your new year is going well. State tax legislative sessions are beginning and talks of crazy tax hikes (Illinois), and imposing sales taxation collection obligations on remote retailers is commencing (Wyoming). Some may even try to eliminate the corporate income tax (Missouri).

The Multistate Tax Commission continues its Sec. 18 Regulatory Project. According to the MTC, the Section 1 and 17 workgroups have identified a list of issues that may need to be addressed by the Uniformity Committee in light of changes to Article IV (UDITPA) adopted by the Commission in 2014 and 2015. The list includes (but is not limited to) the following:

•  Address the possible distortion that could be caused by the exclusion of functional receipts from the definition of “receipts” for purposes of the receipts factor in certain circumstances.
• Consider exceptions to the definition of “receipts,” which now excludes receipts from securities and hedging, where these receipts might represent “transactional” receipts for certain taxpayers (e.g. brokers) as well as how possible distortion might be avoided (e.g. churning of investments).
• Consider whether receipts from factoring of receivables should ever be included in the receipts factory.
• Address any situations where general population data, used under the draft Section 17 sourcing rules, might result in distortion and what methods might be used to address that distortion.
• Consider whether there needs to be a “de minimis rule” for sourcing of receipts in certain instances so that the taxpayer may use a proxy for sourcing, or possibly throw out those receipts from the factor.
• Address regulations that might be needed to interpret and implement the amendments to Article IV, Section 18 made by the Commission in 2015.
• Consider other special industry rules that might be necessary.

In addition to the technical matters we deal with, I hope your career is moving in the direction you desire. If not, remember, action over intention. Can't get a different result by doing the same thing over and over again.

COST Releases 14th Annual Study of State and Local Business Taxes

The Council On State Taxation (COST) recently released its fourteenth annual study of state and local business taxes. The report, "Total State and Local Business Taxes: State-by-State Estimates for Fiscal Year 2015," prepared by Ernst & Young LLP, shows all state and local business taxes paid in each of the 50 states and the District of Columbia. These taxes include business property taxes; sales and excise taxes paid by businesses on their input purchases and capital expenditures; gross receipts taxes; corporate income and franchise taxes; business and corporate license taxes; unemployment insurance taxes; individual income taxes paid by owners of non-corporate (pass-through) businesses; and other state and local taxes that are the statutory liability of business taxpayers.

According to the report, businesses paid more than $707.5 billion in state and local taxes in FY 2015, an increase of 1.9% from FY 2014. State business taxes grew less quickly than local taxes, with state taxes growing 1.0% compared to local tax growth of 2.9%. In FY 2015, business tax revenue accounted for 44.1% of all state and local tax revenue. The business share has been within one percentage point of 45% since FY 2003. 

I always enjoy these reports as they provide additional insight and context into the debate around state tax policy. The difference in the amount of sales taxes paid versus income tax paid always stands out to me: 

• General sales taxes on business inputs and capital investment totaled $150.6 billion, or 21.3% of state and local business taxes. 
• State and local corporate income and business gross receipts tax revenue was $67.3 billion, or 9.5% of all state and local business taxes. 

Will the report encourage changes in state tax policy? 

Will the report encourage taxpayers to change tax planning or operations?

YEAR-END TAX PLANNING: DON'T FORGET THE SALT

I have been swamped the past month with work and finishing our 6-month house renovation, so please forgive me for not posting as often. 2017 will be different. Looking to do great and different things in the world of state taxation next year. We are planning on moving-in this weekend (before Christmas - YES!). If you are considering renovating a house, feel free to contact me. I will give advice and my story. It may be helpful, or not.

In the midst of the chaos, I thought I would send out my annual year-end state tax planning list. Its strange, but predictable, that the list hasn't really changed from year-to-year. 

The following is a brief list of some actions you may want to take RIGHT NOW:

1. Nexus and FIN 48: At this time of year, it is a good time for companies to address their nexus position in advance of their FIN 48 analysis. Operations may also be able to be restructured. If your company or client utilizes telecommuting employees or independent contractors and hasn’t addressed their nexus position in a while, this may be a good time. Also, more states have adopted economic nexus standards and “bright line” nexus standards that may come into play.
2. Sales and Use Tax: It is also a good time to conduct a reverse sales tax audit to identify sales and use tax refund opportunities and potential exposure. If your client has purchased any software, SaaS or cloud computing recently, they may want to confirm there is no sales or use tax exposure. States are still playing 'catch-up' with cloud computing, but several states have issued rulings and guidance over the last year.
3. Income Tax: For C corporations, a reverse income tax audit could identify state income/franchise and gross receipts tax refund opportunities and potential exposure. Combined reporting and apportionment issues or opportunities may exist. Alternative apportionment and transfer pricing have become big (or bigger) issues in 2016.
4. Income Tax: For flow-through entities, a reverse income tax audit may be helpful on major states such as Texas, Michigan, Washington, Pennsylvania, etc.
5. Credits and Incentives: If your company or clients are entering into new states, hiring new employees, building new facilities, retaining employees, "going green," involved with renewable energy, etc. this is a good time to identify and capture credit and incentive opportunities.
6. Transaction Due Diligence: If your company or clients are entering into any acquisitions of other companies or assets, state and local tax issues should be reviewed to determine exposure, successor liability, and nexus impact.
7. Residency Issues: For individual tax clients that have changed their residency to another state or are considering such a change, guidance should be provided in regards to what records they need to maintain, etc.to support their residency or domicile.
8. Employee Misclassification: If your company or client utilizes a high volume of independent contractors, contracts should be reviewed to mitigate exposure of those independent contractors being reclassified as employees.

What do you think? What is a high priority for you? Comment or send me an e-mail.

State Taxation: 'Food For Thought'

My recent posts have contained some of my notes and questions I recorded from attending the Paul J. Hartman State and Local Tax Forum last week. This is my last post which lists 20 takeaways or 'food for thought.'

1. The Organisation for Economic Co-operation and Development (OECD) does not identify tax havens, so why are the states?
2. Discretionary Authority is no warning. It doesn't allow taxpayers to know what a state will do (i.e., using alternative apportionment or combined reporting to force a taxpayer to deviate from the standard apportionment formula; or modifying a costs-of-performance statute to get a market-based sourcing result).
3. International taxation is starting to use state tax concepts such as combined reporting and apportionment.
4. "Are 'bright-line' tests knee-jerk reactions?" - quote from one of the speakers
5. "Tax Haven legislation should be trashed. Tax haven legislation picks winners and losers." - quote from one of the speakers
6. The only way to fight retroactive legislation is to monitor it and lobby against it before it is enacted.
7. Should states be able to enact retroactive legislation to protect the state budget from financial loss?
8. Should judicial decisions only apply to the taxpayer involved in the litigation if it involves a refund?
9. Retroactive legislation should not be able to increase revenue.
10. Ask yourself, if a 'technical correction' is creating new law or changing the interpretation of the law from the original interpretation that has been followed by taxpayers for years. If the answer is yes, do something.
11. Should retroactive legislation be limited to a state's statute of limitations?
12. Prior legislatures can't bind future legislatures.
13. New legislatures can't determine, or know, the intent of prior legislatures. Shouldn't be able to unbind or unwind prior legislation.
14. "Retroactive legislation is telling you what the law was." - quote from one of the speakers
15. Are we moving from apportionment to allocation when we use single-sales factor apportionment and market-based sourcing?
16. Is single-sales factor apportionment 'fair apportionment'? Moves income to customer states, not to states where the activities occurred that generated the income. Income is not based solely on sales.
17. "Throwback and throwout rules are unconstitutional because they look beyond the borders of the state." - quote from one of the speakers
18. If alternative apportionment is wide open and anything goes, why have statutes?
19. "To gain true insight, read the entire case - don't just read the blurb. See what it says and what it doesn't say." - quote from one of the speakers. Get creative. See the case, the issue from a different perspective. Ask "why not."
20. Does common sense apply? If so, is your definition of 'common sense' the same as mine?

Obviously, I obtained all of the thoughts above from the Forum. Some are quotes from speakers, some are ideas paraphrased from a speaker's discussion, and others are personal reflections. 

State Taxation of The Sharing Economy - My Notes From the Paul J. Hartman SALT Forum

As I was sitting in the State Taxation of the Sharing Economy (i.e, Uber, Airbnb, etc.) session at the Paul J. Hartman State and Local Tax Forum presented by Jeremy Abrams, French Slaughter and Reid Okimoto last week, I took some notes. Here are a few of them:

1. How you characterize a charge (i.e., label it) and the contract language will most likely determine how the charge is taxed for sales tax purposes.
2. Will states 'back into' the characterization?
3. How do you source the sharing economy? By service address, billing address, or where the transaction starts or ends?
4. Does the Internet Tax Freedom Act pre-empt any sales taxation of the sharing economy?
5. Is physical presence 'nexus' MORE important, NOT less important due to technology advances and changes in how transactions occur?

Dot Foods & Washington: A Case Study on Intent, Interpretation and Retroactivity

Regardless of whether you have been following Dot Foods v. Washington Department of Revenue cases for the last several years, we need to pause and review.

According to the decision, Dot Foods 1  involved Dot Foods utilizing an exemption from the Washington Business & Occupation (B&O) tax for many years (note: the statute was originally enacted in 1983). Dot Foods facts changed from 1997 to 2000, but Dot Foods interpreted the exemption to still apply. In 1999, the state revised its interpretation of the statute to narrow the exemption, under which, Dot Foods would no longer qualify.

Washington later audited and assessed Dot Foods additional tax for the 2000 to 2004 tax years based on the state's revised interpretation. Dot Foods paid the tax, and filed a refund claim, eventually winning in the Washington Supreme Court in 2009. In simple terms, the court held the state's new interpretation was incorrect, and the state simply can't change it's long-standing interpretation of a statute without changing the legislation itself. The court said:

"The Department's argument for deference is a difficult one to accept, considering the Department's history interpreting the exemption. Initially, and shortly after the statutory enactment, the Department adopted an interpretation which is at odds with its current interpretation. One would think that the Department had some involvement or certainly awareness of the legislature's plans to enact this type of statute. As a general rule, where a statute has been left unchanged by the legislature for a significant period of time, the more appropriate method to change the interpretation or application of a statute is by amendment or revision of the statute, rather than a new agency interpretation."

 Dot Foods, Inc. v. Dep't of Revenue, No. 81022-2, SUPREME COURT OF WASHINGTON, 166 Wn.2d 912; 215 P.3d 185; 2009 Wash.

While Dot Foods 1 was going on, (2005 to 2009), Dot Foods paid tax under the state's new interpretation of the statute to avoid penalties and interest. When Dot Foods 1 was decided in 2009, Dot Foods filed a refund claim for the 2005 to 2009 tax years.

Washington amended the statute in 2010 after Dot Foods 1 was decided in 2009, and applied the amendment retroactive to when the statute was originally enacted in 1983. According to the Washington State Budget and Policy Center's report in May 2010,

"the legislature enacted technical corrections and clarifications to state tax laws that will prevent steep revenue losses in the current year and in future years. This includes the legislature’s response to a recent State Supreme Court case that greatly expanded an exemption originally intended only for companies such as Avon and Mary Kay that sell products solely through door-to-door salespersons (Dot Foods decision). Without legislative action, the state would have lost about $151 million in the current biennium due to refunds and new firms claiming the exemption."

Under the authority of the retroactive amendment to the statute, Washington denied Dot Food's 2005-2009 refund claim (note, some of these tax years have been settled). Dot Food's challenged the ability of Washington to change the statute retroactively (Dot Foods 2). The Washington Supreme Court ruled in the state's favor in March 2016 holding that the legislature's amendment which retroactively narrowed the exemption and prospectively repealed the exemption, did not violate a taxpayer's rights under the Due Process Clause of the U.S. Constitution, collateral estoppel, or separation of powers principles. The court said:

"Retroactive application of the amendment did not violate due process protections because the amendment served a legitimate legislative purpose and was rationally related to the legitimate legislative purpose. The amendment prevented large revenue losses and removed preferential tax treatment for out-of-state businesses. In addition, the requirements of collateral estoppel were not met because collateral estoppel does not apply to subsequent taxing periods that were not previously adjudicated. Finally, since the taxpayer could not point to any evidence that the legislature intended to affect or curtail a prior judgment in the case, retroactive amendment did not violate the separation of powers doctrine."

Dot Foods, Inc. v. Dep't of Revenue, No. 92398-1, SUPREME COURT OF WASHINGTON, 185 Wn.2d 239; 372 P.3d 747; 2016 Wash.

Dot Foods requested the U.S. Supreme Court to review the case. We are waiting to learn if the Court will. Here are links to briefs filed by various organizations in support of Dot Foods:

• TEI Brief
• COST Brief
• American College of Tax Counsel Brief

Note: I am working on a more in-depth article for my column in Tax Analysts State Tax Notes.

Stay tuned.