2015 State & Local Tax Update

State & Local Taxes

Presented by

Craig Williams, Managing Director, CBIZ National SALT Practice Leader Email: [email protected] | Phone: (770) 858-4464

linkedin.com/in/craigwilliamscbiz

Topics:

Overview of Multistate Apportionment

Cost of Performance Sourcing

Market Based Sourcing

Discussion of Specific States

Illustrative Examples

2

Multistate Apportionment - General

3

Emphasis on sales factor benefits in-state companies to the detriment of out-of-state companies

Sales factor only is increasingly popular


Types of Apportionment Formula

UDITPA three-factor formula with equal weighting

Double-weighting, triple-weighting or super-weighting sales

factor

Sales factor only formula

Other Apportionment Formulas Certain industries might be assigned specific apportionment

factors: banking, transportation, construction, communications,

insurance

If prescribed allocation and apportionment do not result in an appropriate tax, a taxpayer may petition for an alternative

apportionment method


Receipts Factor Tangible Personal Property (TPP)

Gross receipts from sales of TPP sourced to state of ultimate destination

Several states apply throwback rule

Sale of TPP

Receipts Factor Other than TPP

Sourcing Methods

Majority cost of performance All or nothing

Ratio cost of performance Proportional

Market Location of customer

Sales of Other Than TPP

Location of income-producing activity based on cost of performance

Majority sources 100% of receipts to state with greater preponderance of costs

Ratio sources relative to percentage of costs in each state

Cost of Performance

Generally sources receipts of other than TPP to customer or market

No uniform methodology as rules vary among states

Alternative to Cost of Performance

Become the trend states are moving from COP to Market


Why market-based sourcing? Criticism of Cost of Performance

Ignores customer base

Doubles up on location of payroll & property

Provides benefit to service providers with in-state facilities, but an out-of-state customer base

Shifts tax burden from service-provider taxpayers with in-state facilities to those with out-of-state facilities

Aligns sourcing of other than TPP with sourcing of TPP


Market Sourcing States Alabama

California

District of Columbia (in 2014)

Georgia

Illinois

Iowa

Maine

Maryland

Massachusetts (in 2014)

Michigan

Minnesota

Nebraska (in 2014)

New York (in 2015)

Ohio (CAT)

Oklahoma

Pennsylvania (in 2014)

Utah

Washington (B&O)

Wisconsin


Market Sourcing Theories Where the service is delivered (esp. services)

Alabama, Massachusetts, Pennsylvania

Where the benefit is received (esp. services)

California, Iowa, Michigan, New York, Ohio, Utah, Washington, Wisconsin

Where the service is received

Illinois, Maine, Minnesota

Where the customer is located

Georgia, Maryland, Oklahoma


Issues Services

Where is the market when selling to multistate businesses?

Is there enough ambiguity to invite controversy?

Do differences in state regimes preclude a single approach?

Intangibles

How does one determine where and to what extent used?

Is it possible to get the data from a customer?

Throwout

At what point does the taxpayer give up and throw out?


Current law (pre 2015) Article 9-A (general corporation)

Single-receipts factor

Generally sources sales of services to the extent the services were performed in New York

Sources other business receipts to the extent earned in New York

Article 32 (bank) Three factor formula (deposits, payroll and receipts)

New York

New law (2015 & after)

Eliminates disparate apportionment schemes (banks vs. general business corporations)

Replaces general service category with specific service categories (i.e. advertising services, aviation services, etc.)

Lumps other services into the other business receipts category

Expands market-based sourcing rules to most receipts

New York

New law Other Business Receipts and Services Catch-all category

Hierarchy for sourcing: Where benefit is received

Delivery destination

The apportionment factor for such receipts from the preceding year

The apportionment factor in the current year

Taxpayers must exercise due diligence and must base on information known or information known upon reasonable inquiry

New York

New law Observations Achieve uniformity among taxpayers

Adoption of the current trend favoring market-based sourcing

Appears consistent with the Departments previous position in audits and administrative guidance

Detailed rules that cover a broad spectrum of transactions

Administrative guidance will be needed to help taxpayers understand how to apply all of the rules

o When will this guidance be issued?

New York

Market Based Sourcing Tied to single-factor sales

Optional for tax years beginning 1/1/11

Mandatory for tax years beginning 1/1/13

Issued comprehensive regulatory guidance

California


Identifies five types of sales Tangible personal property

Services

Intangibles

Real property

Leases of tangible personal property

Attempts to define identification of market for each

Market defined relative to benefit received by customer

California

Sale of services as an example What is the benefit received?

Did the customer receive the benefit in California? o Entity

Taxpayers books and records (creates rebuttable presumption)

Reasonable approximation of benefit

Where service ordered

Billing address

o Individual

Billing address (creates rebuttable presumption)

Taxpayers books and records

Reasonable approximation

California

District of Columbia Market based: For tax years beginning on or after 1/1/2015, services

are sourced to the location of delivery. Majority cost of performance prior to 1/1/2015.

Maryland Market based: Receipts from contracting or service-related activities

shall be sourced to Maryland if the receipts are derived from customers within the state.

Virginia Majority cost of performance: Receipts from the provision of services

are sourced to Virginia if the income-producing activity that created the receipt occurred entirely within Virginia, or to a greater extent in Virginia than in any other state, based on cost of performance.

Other States

Pennsylvania Market based: For tax years beginning on or after 1/1/2014,

services are sourced to the location of delivery. Majority cost of

performance prior to 1/1/2014.

Ohio Market based: Receipts from the provision of services must be

sourced to Ohio in proportion to the purchaser's benefit received

in Ohio compared to the benefit received everywhere

Texas Ratio cost of performance: Receipts from the provision of services

must be sourced to Texas if the services are performed in Texas

Other States

Florida Majority cost of performance: Receipts from the provision of

services are sourced to Florida if the income-producing activity

that created the receipt occurred entirely within Florida, or to a

greater extent in Florida than in any other state, based on cost of

performance.

Illinois Market based: Sales of services are sourced to Illinois if the

services are received in the state.

Other States

Taxpayer is a consulting firm located in DC

All of its services are performed in its DC office

90% of its receipts are from VA clients

How will these receipts be sourced for receipts factor purposes in DC and VA?

Example 1

2014 Both DC and VA are majority COP

DC: 100% receipts factor

VA: 0% receipts factor

2015 DC is market-based sourcing while VA is majority COP

DC: The percentage of DC market

VA: 0% receipts factor

Example 1

Taxpayer is a consulting firm located in VA

All of its services are performed in its VA office

90% of its receipts are from DC clients

Annual receipts of $10M for 2013 and 2014

How will these receipts be sourced for receipts factor purposes in DC and VA?

Example 2

2014 Both DC and VA are majority COP

DC: 0M (0% receipts factor)

VA: 10M (100% receipts factor)

2015 DC is market-based sourcing while VA is majority COP

DC: 9M (90% receipts factor)

VA: 10M (100% receipts factor)

Example 2

No Physical Presence Required

Economic nexus

o Use of intangibles by a related party

o Use of intangibles by an unrelated party

o Making a market of the state

o Remote solicitation

Factor-presence nexus

o Level of receipts derived from state

o Above certain dollar threshold = nexus

Factor Presence Nexus

MTC factor presence standard

$500,000 of receipts in a state;

$50,000 of property in a state;

$50,000 of payroll in a state; or

At any time during the calendar year within the state at least 25

percent of the taxpayers total property, total payroll, or total gross

receipts.

Adopted in: OH: Commercial Activity Tax

MI: Michigan Business Tax and Corporate Income Tax

CA, CO, CT & NY (2015): Corporate income/franchise taxes

OK: Business Activity Tax

Factor Presence Nexus

MD company provides a service of $2M where the benefit is received in NY. This is half its total sales. The

company never sets foot in NY. Note the taxpayer is a multistate filer.

Example 3

NY has adopted factor presence nexus beginning in 2015.

How does this affect the apportionment factor?

2014 No physical presence so no nexus

0% apportionment (sales) factor in NY

2015 2M in receipts from NY creates nexus in NY

50% apportionment factor in NY

Example 3

What if NY was a market sourcing state without factor presence nexus?

No physical presence so no nexus


What if NY was a cost of performance state with factor presence nexus?

2M in receipts from NY creates nexus in state


Example 3

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Transcript of 2015 State & Local Tax Update