© Grant Thornton. All rights reserved. COST Mid-Atlantic Regional State Tax Seminar Basking Ridge, NJ Current Developments in the Mid-Atlantic States June

© Grant Thornton. All rights reserved.

COST Mid-Atlantic Regional State Tax Seminar Basking Ridge, NJ

Current Developments in the Mid-Atlantic States

June 3, 2015

Matthew DiDonato, Grant Thornton LLPJamie Yesnowitz, Grant Thornton LLPArthur C. E. Burkard, Grant Thornton LLP

© Grant Thornton LLP. All rights reserved.

Learning objectives

• Review Mid-Atlantic states' recently enacted legislation, including New York State and City of New York Tax Reform

• Review Mid-Atlantic states' proposed legislation, including Connecticut FY 2016/2017 Budget Proposal and other notable developments

• Identify potential implications arising from the recent law changes as well as opportunities for your company

© Grant Thornton LLP. All rights reserved. 3

NEW YORK STATE 2014 BUDGET LEGISLATION


NYS 2014 Budget Legislation

Summary of NYS 2014 Tax Reform (1 of 2)

• Major changes to New York's tax structure– Most changes are effective for tax years beginning on or after Jan.

1, 2015• Economic nexus: Subject to corporation franchise tax and metropolitan

tax (MTA) surcharge if derive $1 million or more receipts from New York activity

• Banking corporation tax (Article 32) merged into corporation franchise tax (Article 9-A)

• Both business and banking corporations will use three tax bases: Business income base, capital base and fixed dollar minimum base– Alternative minimum tax base and subsidiary capital concept will be

eliminated– Capital base tax will be completely phased out by 2021


NYS 2014 Budget Legislation

Summary of NYS 2014 Tax Reform (2 of 2)

• Mandatory unitary combined reporting– Substantial intercorporate transactions requirement eliminated– More than 50% ownership – Business and banking corporations may be included in same group

• Apportionment: Single receipts factor with intricate customer-based sourcing rules– Specific provisions for other business receipts, rents and royalties, and digital

products– Annual election to use fixed amount of 8% of all net income from qualified

financial instruments in numerator– Receipts from services sourced based on customer location hierarchy

• NOLs computed on post-apportionment basis; state deduction no longer tied to federal amount; PNOL conversion subtraction

• Effective Jan. 1, 2016, corporate franchise tax rate reduced• Tax incentives and rate reductions for "qualified manufacturers"


NEW YORK STATE FY 2015/2016 BUDGET

LEGISLATION


NYS FY 2015/2016 Budget Legislation

Economic Nexus

• 2015/2016 NYS budget legislation clarifies the following with respect to economic nexus standard enacted last year:– When aggregating a combined group’s receipts for purposes of

determining economic nexus under the $1M or more of aggregate receipts threshold, only corporations that are part of a unitary group and satisfy the ownership test of more than 50 percent are considered.

– Revised nexus provisions exclude corporations that are not permitted to be included in the State combined filing group for Article 9-A from the nexus analysis.o Article 9, Article 33, S corporations, alien corporations without

ECI, etc.



Investment Capital Classification

• 2015/2016 NYS budget legislation further restricts the definition of investment capital to include only stocks that:

1. Satisfy the definition of a capital asset under IRC Section 1221;

2. Are held by the taxpayer for investment for more than one year;

3. The disposition of which are, or would be, treated by the taxpayer as generating long-term capital gains or losses under the IRC;

4. For stocks acquired after January 1, 2015, have never been held for sale to customers in the regular course of business at any time after the close of the day in which they are acquired; and

5. Before the close of the day on which the stock was acquired, are clearly identified in the taxpayer’s records as stock held for investment in the same manner as required under IRC Section 1236(A)(1). Taxpayers have until October 1, 2015 to comply with this new reporting requirement.


NYS FY 2015/2016 Budget LegislationSourcing of Marked-to-Market Financial Instruments (1 of 2)

• 2014 NYS budget legislation created a simplifying mechanism which gave taxpayers the option to make an annual and irrevocable election to use a fixed amount of 8 percent of all net income from “qualified financial instruments” in the apportionment numerator in lieu of using customer-based sourcing.

• 2015/2016 NYS budget legislation clarifies that when the fixed 8 percent election is not made, only the net marked to market income, gain or loss, is to be included in the apportionment factor.


NYS FY 2015/2016 Budget LegislationSourcing of Marked-to-Market Financial Instruments (2 of 2)

• 2015/2016 NYS budget legislation additionally expands the definition of "qualified financial instruments" to include the following types:– Loans not secured by real property;– Federal, state, and municipal debt;– Asset-backed securities and other government agency debt;– Corporate bonds;– Stock or partnership interests that are not investment capital;– Physical commodities; and – Other financial instruments.

• The legislation now includes a definition for loans secured by real property and includes loans in which 50 percent or more of the collateral used to secure the loan, at the time the loan was entered into, consists of real property.



Qualified New York Manufacturers

• Beginning tax years on or after January 1, 2014, "qualified New York manufacturers" are subject to a zero percent business income tax rate.– A "qualified New York manufacturer" is defined as:

• A manufacturer that meets the New York property test, and • Is principally engaged in manufacturing activities (>50%).

– New York-located property test:• Property eligible for the NY investment tax credit with an

adjusted basis of at least $1 million; or • All real and personal property located in New York.

• 2015/2016 budget legislation clarifies that no member of the corporation’s combined group can qualify if that corporation is part of a combined group that does not meet the test on a combined basis.



Net Operating Losses

• 2015/2016 NYS budget legislation provides further technical corrections to NOL deduction ordering rules:– Taxpayers are now required to first carry back an NOL to the three

years preceding the loss year (excluding years before 2015).– After the application of the carryback rules, any unused NOL may

be carried forward for up to 20 years.– Additionally, an election can be made to irrevocably forgo the three-

year carryback of NOLs. • Election is necessary for each year a new NOL is generated and

applies to all members of a combined group.


NEW YORK CITY TAX REFORM


New York City Tax Reform

Overview

• NYC enacts significant tax reform effective retroactively to January 1, 2015.

• Significant reforms fall into two overlapping categories:1. Changes to align to the NYS corporate tax law; and2. Expansion of the corporate tax base for corporations outside the City

such as:• Mandatory combined reporting for unitary businesses; and• Market based sourcing.

• NYC reforms do not apply to S-Corporations and the Unincorporated Business Tax.

• NYC Changes similarly eliminate the concept of Subsidiary Capital and additional tax on subsidiary capital.



Income Tax Rates

• Income tax rate for corporations remains at 8.85 percent, however:– A graduated system was added which reduces the tax rate for

corporations with less than $3 million of allocated business income;

– A 9 % bracket was added for “financial corporations” with more than $100 billion of assets as reported on their end-of-year balance sheet; and

– A preferential 4.425 % rate was added for qualifying small NYC

manufacturing corporations with less than $10 million of NYC allocated business income (without taking into account the PNOL conversion subtraction).



Capital Tax Rates

• Capital tax rate for corporations remains at 0.15 percent of business capital allocated to NYC, however:– The cap has been increased from $1 million to $10 million; and– NYC tax on business capital now excludes the first $10,000 of tax

due on the capital base.

• New York City has not conformed to the State phase-out provisions that eliminate the capital base tax.



Fixed Dollar Minimum Tax

• Fixed Dollar Minimum Tax remains the same for corporations with NYC receipts up to $50 million, however:

– 5 new brackets created for corporations with more than $50 million of NYC receipts.

– Maximum of $200,000 for corporations with more than $1 billion of NYC receipts.



Tax Base (1 of 2)

• NYC tax reform conforms the City’s general corporate net income tax base to the State’s corporate net income tax base under Article 9-A.– “Business income” is defined as entire net income from all sources

less investment income and other exempt income.

– “Investment income” includes the following:• Capital gains in excess of capital losses, • Income from investment capital (using the same definition as the

State), and• Any interest deductions allowable in computing entire net

income which are directly or indirectly attributable to investment capital or investment income.



Tax Base (2 of 2)

– Investment income cannot exceed entire net income. If the amount of interest deductions exceeds investment income, the excess of these deductions over investment income must be added back to entire net income.

– In lieu of deducting interest deductions from investment income, taxpayers can elect to reduce total investment income by 40 percent.



Economic Nexus

• The City did not adopt the State’s economic nexus provisions.

• However, NYC did adopt a limited economic nexus concept to companies issuing credit cards.

• A corporation is doing business in NYC if it:– has issued credit cards to 1,000 or more customers who have a mailing

address within the NYC as of the last day of its taxable year (“customer nexus”);

– has merchant customer(s) with merchants contracts (“contract nexus”) and the total number of locations covered by those contracts equals 1,000 or more locations in NYC to whom the corporation remitted payments for credit card transactions during the taxable year; or

– the sum of the number of customers giving rise to customer nexus and the number of locations giving rise to contract nexus equals 1,000 or more.



Apportionment / Customer Based Sourcing

• The City will continue to phase in a single receipts factor apportionment, with full implementation in tax years starting on or after January 1, 2018.

• Taxpayer's with $50 million or less in receipts allocated to NYC may make a onetime, revocable election to retain the 2017 factor ratios (3.5% property and payroll and 93% receipts), instead of 100% receipts.

• Customer-based sourcing rules have been enacted for a number of different revenue streams including sales of digital products, various financial transactions, advertising, and other industry-specific receipts.

• For receipts that are not specifically addressed, the rules direct that the taxpayer to source those receipts to the city based on a customer location hierarchy.


New York City Tax ReformApportionment / Hierarchy for Sourcing Other Business Receipts

• Sourcing rule Hierarchy:

1. Benefit is received in the state

2. Delivery destination

3. Prior year apportionment fraction for such receipts

4. Proxy using apportionment fraction for the current year using receipts sourced under method 1 and 2.

• Taxpayer must exercise due diligence before proceeding to next level and base determination on information known or that would be known upon reasonable inquiry.

• Commissioner may adjust or taxpayer may request alternative method.



Qualified New York Manufacturers (1 of 3)

• For purposes of the NYC GCT, qualified manufacturers may obtain the benefit of a lower corporation tax rate.

• A preferential income tax rate of 4.425 percent will be instituted for qualified small NYC manufacturing corporations with less than $10 million of allocated business income (without taking into account the PNOL conversion subtraction).

• NYC manufacturers with allocated income between $10 million and $20 million will receive a partially reduced rate dependent on income. However, manufacturers may lose some of the benefits of the reduced City manufacturer tax rates of their unallocated business income in excess of $20 million. Manufacturers with unallocated business income in excess of $40 million will be subject to the 8.85 percent tax rate

• Certain qualifications must be met including:– Having qualified property in the State, the adjusted basis of which at the end of the

tax year is at least:o $1 million, oro 50 percent of the manufacturer’s real and personal property that is located in the

State.




• "Property" for a Qualified NY Manufacturer purposes conforms to NY ITC regulations and includes tangible personal property and other tangible property such as buildings, and structural components of buildings, that:

1. Is depreciable under IRC Section 167;

2. Is acquired by purchase as defined in IRC Section 179(D);

3. Has a useful life of four years or more;

4. Is located in the State; and

5. Is principally used by the taxpayer in the production of goods by manufacturing.




• Manufacturing is defined for City purposes as:– The process of working raw materials into wares suitable for use, or – Giving new shapes, qualities, or combinations to matter which has

already gone through some artificial processes.

• The NYC definition of qualified manufacturer is different from the NYS definition of qualified manufacturer.



NYC Bank Tax

• NYC tax has adopted most of the State's changes relating to banking corporations formerly taxable under Article 32. – Banks now subject to the General Corporation Tax. – City has adopted receipts sourcing rules equivalent to the State’s

rules for the sourcing of loans and financial instruments– City has provided for subtractions for community banks and small

thrifts with less than $8 billion in assets.

• Until the City completes its phase-into a single sales factor apportionment methodology, banks will now be required to calculate a City property factor.



Combined Reporting Requirements (1 of 2)

• NYC tax reform requires combined reporting for any taxpayer that:– Owns or controls more than 50 percent of the voting power of the

capital stock of one or more other corporations; – Owns or controls more than 50 percent of the voting power of the

capital stock of which is owned or controlled by one or more other corporations; or

– Owns or controls more than 50 percent of the voting power of the capital stock of which and the capital stock of one or more other corporations, is owned or controlled by the same interests; and

– Is engaged in a unitary business with those corporations.



Combined Reporting Requirements (2 of 2)

• Substantial intercorporate transaction and distortion tests have been eliminated.

• New rules do not define what constitutes a “unitary business,” but this concept is generally characterized as follows:– A group of businesses which possess:

• functional integration;• centralized management; and• economies of scale.



Prior Year Net Operating Loss Deduction (PNOLD)

• Legislation requires the available pre-apportionment NOL as of 12/31/14 to be converted to a post apportionment NOL utilizing the following formula:

Available loss × 2014 BAP × the base year (2014) tax rate

8.85%



PNOLD Carryover Requirements

• 1/10th of the PNOLD may be utilized in each year plus any unused conversion subtractions from prior years and the balance carried forward to 2036 (20 years).

• Election to deduct 50% of the PNOLD in 2015 and 50% in 2016.

• Small Business Corps are not subject to the 1/10th limitation.

• The PNOLD is applied before NOLD.


CONNECTICUT FY 2016/2017 BUDGET

PROPOSAL


Connecticut FY 2016/2017 Budget Proposal

Summary of Budget Proposal (1 of 2)

• Corporate Income Tax Proposals:– New combined reporting requirement for corporations created; – 20 percent corporation income tax surcharge for two additional

years, to the 2016 and 2017 income years extended;– Temporary 10 percent surcharge for the 2018 income year imposed;

– Limitations created for the amount of net operating losses and

business tax credits that corporations may use to reduce their tax liability; and

– Business entity tax reduced.



Summary of Budget Proposal (2 of 2)

• Sales and Use Tax Proposals:– Sales and use tax split into 2 separate taxes: (1) "State revenue tax"

and (2) "Municipal revenue tax";– State revenue tax reduced;– Sales and use tax extended to a range of professional services;– Rate increased on computer and data processing services; and– Exemption for clothing and footwear costing less than $50

eliminated.



Combined Reporting

• The proposed bill would require any company that is (1) a member of a corporate group of related companies meeting certain criteria; and (2) subject to the Connecticut corporation tax to determine its Connecticut corporation tax liability based on the net income or capital base of the entire group.

• Under the proposed bill, a company must use this method if it is part of a combined group engaged in a "unitary business."



Unitary Group (1 of 2)

• The proposed bill defines "unitary" as follows:– A single economic enterprise that is integrated, or interrelated

enough through its activities to provide mutual benefit and produce a significant sharing or exchanges of value among it's entities or a significant flow of value among it's separate parts.

• Unitary group may be:– Either separate parts of single entity; or– A group of separate entities under common ownership.



Unitary Group (2 of 2)

• Common Ownership:– If the same entity or entities directly or indirectly own more than

50% of voting control of each of them.

• Combined Group:– All the companies that:

• Have common ownership, • Are engaged in a unitary business, and • Have at least one member that is subject to the CT corporation

tax.



Group Filing Requirements• The proposed bill gives a combined group the option of determining its

members' net income, capital base, and apportionment factors on a:– World wide basis (including foreign affiliates), or – Affiliated group basis.

• Filing election would be binding for the income year in which it is made and the following 10 years.

• If an election is not made to use the world wide basis or affiliated group, net income, the capital base, and the apportionment factors must be determined on a "water's edge basis."



Corporate Income Tax Surcharge

• The proposed bill would enact the following in regards to the CT corporate income tax surcharge:– Extension of the 20 percent corporation income tax surcharge for 2

additional years to the 2016 and 2017 income years; and – Imposition of a temporary 10 percent surcharge for the 2018 income

year.



Net Operating Losses

• Beginning with the 2015 income year, the bill would limit the amount of NOL a corporation may carry forward to the lesser of:– 50 percent of net income, or for companies with taxable income in

other states, 50 percent of the net income apportioned to Connecticut, or

– The excess of NOL over the NOL being carried forward from prior income years.



Corporate Income Tax Credits• Beginning with the 2015 income year, the bill would reduce the tax

credit limit to 50.01 percent.

• Insurance Premium Tax Credit:– The bill would extend, to 2015 and 2016, the temporary cap on the

maximum insurance premium tax liability that an insurer may offset through tax credits.

• Film and Digital Media Production Tax Credit:– The bill would extend, to 2016 and 2017, the temporary moratorium

on issuing film and digital media production tax credits for certain motion pictures.



Business Entity Tax

• Beginning with the 2015 tax year, the bill would reduce the business entity tax from $250 to $125.

• The tax is due every other year and applies to the following entities:– Limited liability corporations, – Limited liability partnerships, – Limited partnerships, and– S-Corporations required to register with the Secretary of State.



S&U Tax - Rates

• Beginning October 1, 2015, the proposed bill would split the 6.35% sales and use tax rate into the following:– 5.85 percent "state revenue tax," and – 0.50 percent "municipal revenue tax."

• Beginning July 1, 2016, the proposed bill would:– Lower the state revenue tax from 5.85 percent to 5.35 percent; and – Maintain the municipal revenue tax rate at 0.05 percent.



S&U Tax - Computer and Data Processing Services• The proposed bill would increase the sales and use tax on computer

and data processing services from 1 percent to 6.35 percent. – The types of computer and data processing services subject to tax

expanded to include the creation, development, hosting, and maintenance of a web site.



S&U Tax – Clothing and Footwear Exemption

• The proposed bill would eliminate the sales and use tax exemption for clothing and footwear costing less than $50.

• Exemption for clothing and footwear during "sales-tax-free-week" also limited to items costing less than $100, rather than $300.



S&U Tax – New Taxable Services• The proposed bill would extend the sales and use tax to the following

professional services:

CPAs and other accounting services Other management consulting services

Architectural services Other scientific and technical consulting services

Engineering services Direct mail advertising

Drafting services Advertising material distribution services

Building inspection services Marketing research and public opinion polling

Geophysical surveying and mapping services Translation and interpretation services

Surveying and mapping services, except geophysical Veterinary services

Interior design services All other professional, scientific, and technical services

Industrial design and other specialized design services Other gambling industries

Administrative management and general management consulting services

Golf courses and country clubs

Human resources consulting services Dry cleaning and laundry services, except coin operated services

Process, physical distribution, and logistic consulting services

Marketing consulting services


NEW JERSEY


The 2014 Budget

• Significant legislation enacted on June 30, 2014 for the 2015 fiscal year:– Operational income redefined– Limitations on partners' ability to claim refunds for tax paid on their

behalf by in-state partnerships– Limitations on use of NOL deductions and carryovers after certain

debts have been discharged– Click-through sales and use tax nexus


Other Notable Developments

• On May 11, 2015, Governor Chris Christie conditionally vetoed A 939, which would have expanded state law to require a report on whether tax incentives have met their goal

• New Jersey Division of Taxation Director Michael Bryan resigned effective March 10, 2015. Dennis Shilling is currently serving as the Acting Director

• Village Super Market of PA Inc. v. Div. of Taxation was dismissed from the New Jersey Superior Court, Appellate Division on March 9, 2015 due to settlement between the parties


PENNSYLVANIA


Related Party Expense Addback

• The addback provision– "[F]or taxable years beginning after December 31, 2014, … no

deduction shall be allowed for an intangible expense or cost, or an interest expense or cost, … accrued or incurred directly or indirectly in connection with … an affiliated entity…."

• Numerous exceptions to addback: – Arm's length / non-tax avoidance– Treaty– Conduit– Apportioned credit to extent affiliated entity paid Pennsylvania

Corporate Net Income Tax on expense added back


Other Notable Corporate Income Tax Issues

– Tax statutes• CSFT eventually will be eliminated

– .67 mills for 2014– .45 mills for 2015, and then set to expire

• CNI net operating loss limitations loosened somewhat– Tax years beginning after 2014 – greater of $4 million or

25% of taxable income– Tax years beginning after 2015 – greater of $5 million or

30% of taxable income– Policies by Department

• Liberal use of "sham transaction" doctrine evidenced in the first rulings published by new Board of Finance and Revenue


Elements of the Wolf Plan

– Tom Wolf, the new governor of Pennsylvania, has proposed tax reforms that are currently being considered in the PA Senate:• Corporate income tax would go down from 9.99% to 5.99% in

2016 and 4.99% in 2018• Combined reporting in 2016• Personal income tax would go up from 3.07% to 3.7%• Sales tax rate would go up from 6% to 6.6%• Sales tax base would be broadened to include numerous

"miscellaneous services", excluding certain B-to-B services, and digital products delivered electronically or digitally

– PA House bill -- property tax rate for sales / income tax rate tradeoff– Which bill comes out? Will PA tax rates significantly change?


DELAWARE


Unclaimed Property Developments

• SB 11 adopted in February 2015 – contains a number of notable provisions:– Limits on total number of audits that can be assigned to one outside

contractor, and sets a five-year limit on contracts– Requires assurance in contract that Delaware Department of

Finance cannot be involved until after two-year cooling-off period– Requires publication of unclaimed property audit manual containing

procedural guidelines, and updated regulations


DISTRICT OF COLUMBIA


2014 Budget Legislation (Income Tax)

• Budget legislation enacts single sales factor apportionment, effective for tax years beginning after Dec. 31, 2014– Previously used three-factor formula with double-weighted sales

• Market-based sourcing for sales other than tangible personal property– Detailed sourcing rules

• DC has indicated it will rely upon both MTC and MA sourcing rules.– Sale of services sourced to location of delivery – States of assignment may be approximated if they are not determinable

using detailed rules– Originally effective 10/1/14 but updated to align with single sales factor

apportionment date of 1/1/15


2014 Budget Legislation (Sales Tax)

• Sales and Use Tax Legislation– Services subject to sales tax expanded effective Oct. 1, 2014

• Now taxable and included in the definition of "sales at retail" are:o Health club serviceso Self-storage rentalso Car and carpet cleaning serviceso Bottled water deliveryo Bowling alley/billiard parlor services

• DC has indicated this may only be the beginning of broadening the tax base– Most controversial service industry subjected to tax was health club

services (opponents characterized this as the "yoga tax")– Regulations on the sales tax base broadening have been released


MARYLAND


The New Governor

• Newly elected Republican Governor Larry Hogan takes office

• Interesting dynamic as MD has a historically Democratic legislature

• Hogan's State of the State Address proposed tax cuts including:o Elimination of personal property tax for businesses with <$10,000 in

personal propertyo Changes to Sales and Use Equivalency Tax hikes on gaso Elimination of tax on retirement income and of automatic gas tax hikeso Repealing "rain tax" levied to fund stormwater management

• Cost of proposed tax cuts is approximately $27 million in fiscal year, funded by budget cuts


Proposed Compliance Initiative / Amnesty

• Gov. Hogan proposes to supply the MD Comptroller with additional $1 million to hire new employees to collect an estimated $12 million of taxes in arrears

• This compliance initiative may deal with taxpayers not compliant with Gore and Nordstrom decisions

• Tax Amnesty adopted – 9/1/15-10/31/15– Potential to eliminate penalty and ½ of interest owed– Potential to use payment agreement with Comptroller to pay

obligations by 12/31/16• Hogan hopes these efforts will provide revenue to aid in closing

budget gap and cutting taxes


Does Anything Change Because of Wynne?

• In Wynne, the U.S. Supreme Court recently held that the credit for taxes paid to other states under the Maryland personal income tax was unconstitutional

• The decision will cost the state at least $200 million in refunds to Maryland residents, plus prospective revenue

• One should expect significant tax reforms to come in the near future, including: – Threat of combined reporting for corporate income tax– Click-through nexus for sales / use tax– Expansion of sales tax base / rate– MD Tax Revision Commission (maybe next year?)


VIRGINIA


Nielsen vs Board of Arlington County (BPOL)

Virginia's Business, Professional and Occupational License (BPOL) is a gross receipts tax on business occurring at a definite place of business. In the event gross receipts cannot easily be attributed to a definite place of business, a reasonable method of apportionment is allowed.• The Nielsen Company, the taxpayer at issue and a business service

provider, had a definite place of business in Arlington County as well as offices in other states and Virginia localities

• In 2011, Nielsen applied for a refund for tax years 2008-2010 for out-of-state deductions. It also claimed out-of-state deductions on its 2011 and 2012 BPOL returns in accordance with a methodology published by the Virginia Tax Commissioner (P.D. 10-228 (9/29/2010) & 12-89 (5/31/2012))


Nielsen Supreme Court Appeal

• The Supreme Court of Virginia reversed and remanded the case for further review

• The Court held that the payroll apportionment methodology is allowable in determining BPOL out-of-state deductions when out-of-state gross receipts cannot be accurately determined

• The Court also held that it is not arbitrary and capricious to apply this apportionment method as it only applies when the taxpayer is unable to show where gross receipts were earned, as is often the case for services providers

• The Court did not determine which approach should be used; only that the apportionment approach did not contradict the law


Nielsen Tax Ramifications

• Taxpayers are encouraged to follow the guidance offered by the Virginia Tax Commissioner before the decision by the Arlington Circuit Court

• This is not the final ruling as the circuit court will be reviewing the case and could issue a different opinion on the correct treatment based on proper and new evidence

• Taxpayers may have the option to seek refunds through filing amended returns if they have not previously used the payroll apportionment method

• Service businesses, in particular, may be able to benefit from this refund opportunity


Other Notable Developments

• Exceptions to addback are amended (with retroactive effect)

• Fairly significant audit activity on intangible addback exceptions

• Accelerated sales tax phaseout – annual threshold for dealers and direct payment permit holders to make accelerated sales tax payments has gone up and down – threshold is at $26 million effective June 2015, but goes up to $48.5 million effective June 2016


WEST VIRGINIA[nothing to note]


RECENT DETERMINATIONS


MATTER OF TD HOLDINGS II, INC.


Matter of TD Holdings II, Inc.

Issue(s)

• Whether a taxpayer must apply New York State net operating losses against ENI when its franchise tax is computed based on an alternative base?



NYS Franchise Tax

• During the tax years at issue, the New York State franchise tax is computed using the greatest of the following tax bases:

– A percentage of the taxpayer's ENI allocated to New York;– A percentage of the taxpayer's taxable assets allocated to New

York;– A percentage of the taxpayers alternative ENI allocated to New

York; or– A minimum tax of $250.



Administrative Law Judge (ALJ) Determination

• The ALJ accepted the taxpayer's argument that while a New York NOL cannot exceed the federal NOL for a particular tax year, there is no corresponding provision in the tax law providing that a New York NOL deduction can never be less than the federal deduction; and

• Therefore, where a taxpayer's franchise tax is computed based on an alternative base (capital base) other than ENI, the utilization of a New York NOLs is not required.


MATTER OF EXPEDIA INC.


Matter of Expedia Inc.

Issue(s)

• Whether receipts from online travel facilitation is characterized as "service receipts" or "other business receipts" for New York State sourcing purposes?



NYS Franchise Tax

• NYS sourcing rules for receipts from "services" based on the where the taxpayer performed its services.

• NYS sourcing rules for "other receipts" based on the location earned resulting in a "market-based" approach.



Administrative Law Judge (ALJ) Determination

• The ALJ distinguished that the receipts were directly related to travel facilitation services and that these services had many (human element) components and did not result from a single, instantaneous, fully automated transaction.

• As a result, the ALJ determined that the receipts from travel facilitation services performed by the Taxpayer were correctly sourced to the location where these services were performed outside of NYS, and rejected the Department's attempt to source the receipts as "other business receipts."


MATTER OF SUNGARD SECURITIES FINANCE LLC


Matter of SunGard Securities Finance LLC

Issue(s)

• Whether certain services related to performance analytics are considered to be the furnishing of information services and if so, would the information qualify for the "personal or individual" sales tax exclusion?



NYS Sales Tax on Information Services

• NYS imposes a sales tax on the furnishing of information services, but not on information that is personal or individual in nature and which may not be substantially incorporated in reports furnished to other customers.



NYS Tribunal Decision• The NYS Tribunal affirmed an Administrative Law Judge decision which

stated that the not only was the performance analytics service the furnishing of information, it also did not qualify for the "personal or individual" exclusion because it was available to other customers through various other reports.

• As a result, the receipts from the performance analytics service was determined to be subject to sales tax in NYS.


Questions?


Contacts

Matthew DiDonato Jamie Yesnowitz

Grant Thornton LLP Grant Thornton LLP

New York, NY Washington, DC

[email protected] [email protected]

212.542.9960 202.521.1504

Arthur C. E. Burkard

Grant Thornton LLP

New York, NY [email protected]

212.542.9600


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This document supports Grant Thornton LLP’s marketing of professional services, and is not written tax advice directed at the particular facts and circumstances of any person. If you are interested in the subject of this document we encourage you to contact us or an independent tax advisor to discuss the potential application to your particular situation. Nothing herein shall be construed as imposing a limitation on any person from disclosing the tax treatment or tax structure of any matter addressed herein. To the extent this document may be considered to contain written tax advice, any written advice contained in, forwarded with, or attached to this document is not intended by Grant Thornton to be used, and cannot be used, by any person for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.

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© Grant Thornton. All rights reserved. COST Mid-Atlantic Regional State Tax Seminar Basking Ridge, NJ Current Developments in the Mid-Atlantic States June