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State & Local Tax - Income & Sales Tax, Nexus and Incentives
www.pwc.com/il
28 November 2012
Alon Sherer, Senior International Tax Manager, PwC Israel
PwC Israel
November 2012
Agenda
1. Income / Franchise tax
• Nexus
• Trends
• Credits & Incentives
2. Sales Tax
• Nexus
• Trends
• Exemptions
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The world of state taxes
Income Tax Gross
Receipts Tax
Sales Tax
Use Tax
Franchise Tax
Property Tax
Payroll Tax
ABC & Co.
Business Taxes
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PwC Israel
November 2012
Nexus
Generally, nexus is the minimum contact required before a state is able to subject an out of state company to states taxes.
If a company has nexus in a state then the company needs to register, file and pay business taxes (i.e. income/franchise/gross receipts).
Nexus is interpreted differently from state to state!!
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Notable Activities Which May Create Nexus
Employees working in-state and travelling to other states to provide business activities
Corporate office space (owned or rented)
Ownership of inventory, including consigned inventory
Ownership of a warehouse
Ownership of capital equipment, land or other assets
General or limited interest in a partnership doing business in a state (i.e. partnership with rental properties)
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Protected Activities for Income Tax
In-state solicitation - activities of employees engaged in interstate commerce are limited to solicitation of sales of tangible personal property, provided that the employees send the orders out of state for approval and processing.
De-minimis – varies from state to state
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Nexus impacts you in more ways than one
It is important for a corporation to evaluate and determine nexus for the following main reasons:
• Understating/overstating income tax liabilities
• Compliance cost
• Statute of limitations
• Permanent establishment (PE) vs. Nexus
• FAS 109, FIN 48
• Due diligence
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Permanent Establishment vs. Nexus
Other key aspects to consider after assessing nexus:
• State adoption of U.S. income tax treaties
• Worldwide Income vs. Water’s-Edge Income
Example:
Co. ABC domiciled in Israel holds inventory on consignment in NY
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Israel Co. Israel Co.
Federal Tax Effectively Connected
Income
NY/NYC Tax Worldwide
Income
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November 2012
State Income Tax Trends – State Budget Deficits
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Source – Mai, Chris; Oliff, Phil; and Palacios, Vincent, “States Continue to Feel Recession’s Impact." Center on Budget and Policy Priorities. 27 June 2012 <www.cbpp.org>.
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November 2012
State Taxable Income (Tax Base)
Federal Taxable Income +/- State Adjustments -----------------------------------------
Adjusted Federal Taxable Income x State Apportionment % ----------------------------------------- State Taxable Income (Tax Base)
x State Income Tax Rate -----------------------------------------
State Income Tax Liability
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State of the States - Responses
• Combined Reporting
• More aggressive nexus approaches
• Tax Base Changes
- Decoupling from federal stimulus provisions
- Related Party Addbacks
- NOL Suspensions
• Apportionment Changes
- Sales Factor Weighting
- Market – Based Sourcing
• Other Changes
- Amnesty
- Increase in State Tax Audits & Penalties
Slide 12
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November 2012
More Aggressive Nexus Approaches
Economic nexus
• Many states no longer require physical presence (i.e., property or payroll) within the state to establish nexus
• Companies which generate income from licenses, royalties and trademarks.
Factor presence nexus
• Generally, the state has a minimum threshold of receipts in order to be included in the economic nexus regime.
• California sales exceed $500,000 and/or California sales exceed 25% of the company’s total sales
• Connecticut, Colorado, Ohio, Washington
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Market Based Sourcing
Example:
Service company located in New York provides services to customers located in Illinois. What is the effect on total state apportioned income?
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Cost of Performance or Market Sourcing
Apportionment Methodology
Market Single Sales Factor IL
Cost of performance
Single sales factor NY
Cost of performance
(market if single sales factor elected)
Double weighted sales factor OR single sales factor election
CA
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November 2012
Increase in State Tax Audits!!
State tax audits are on the rise (sales tax, use tax, income tax)
IRS and the state authorities are working together
Transfer pricing adjustments being reported by states to IRS
IRS audits – adjustments must be reported to certain states within 30 days!!
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Credits & Incentives
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PA NC
NY
NJ MA CA
Credits
x x x x x R&D
x x x x New Hire
x x x x Investment
x x x x x x Enterprise Zone
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Sales Tax
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November 2012
Sales Tax - background
Sales tax is a transaction tax, similar to VAT.
A gross-basis sales tax is imposed by most states.
Businesses which sell taxable products and services are subject to state/city/county taxes.
Differs from Israeli VAT in that sales tax needs to be collected only when sold to the end user (e.g. retail sale).
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Determining Nexus
Broader definition than income tax nexus.
• Physical presence
• Agency nexus
No protection for mere solicitation activities!!
What is the current trend?
• Affiliate nexus
• Click-Through Nexus
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November 2012
Importance of Determining Nexus
Similar to income tax
Companies are over-looking state filing requirements - it is not always possible to go back to the customer for uncollected sales tax!!!
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November 2012
Trends – Click-Through Nexus
Amazon Law
Vendor presumption (solicitation through online links)
New York state residents provided (paid) online links to Amazon’s website, which New York customers accessed when purchasing products. Amazon was deemed to have “click-through” nexus in New York.
Roughly 20 states have proposed similar type laws, so NY’s ultimate decision can have a significant impact
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Remote Seller Reporting Requirements
State legislation already passed:
Sellers without nexus/not registered to collect sales tax to notify purchasers of use tax obligation
Colorado, North Carolina, Oklahoma, South Dakota, Vermont
As a purchaser are you currently paying use tax?
Federal legislation being considered:
Standardize the taxation of remote sellers
Standardize the taxation of digital goods (conformity for electronically delivered goods and their tangible counterparts)
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November 2012
Taxation of Emerging Technologies
The evolution:
• Electronically Downloaded Software
• Digital Products
• Cloud Computing
• Software as a Service (SaaS)
TPP or Service?
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November 2012
Trends – Taxation of Digital Goods
What is a digital good?
Tangible Personal Property
Data Processing
Information Services
Telecommunications/Ancillary Services
Software
Why does it matter?
Need to know what it is before we can determine how it will be taxed
States moving toward taxation of “digital goods” as new revenue source
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Classification of SaaS
States are taking different approaches to cloud computing, mainly SaaS at this point.
Electronically delivered software
Non-taxable information or data processing service
Taxable information or data processing service
Nothing: state does not tax electronically delivered software or information/data processing services
Slide 25
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November 2012
Sales Tax Exemptions
Do you qualify for an exemption from collecting sales tax?
Wholesale Goods
Tax-Exempt Service
Tax-Exempt Customer
Qualified Medical Equipment
Qualified Manufacturing Equipment
Software delivered electronically vs. on a tangible medium
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Scope and Limitations
• The information contained in this presentation is for general guidance on matters of interest only. As such, it should not be used as a substitute for consultation with professional tax advisors.
• This document was not intended or written to be used, and it cannot be used, for the purpose of avoiding any U.S. federal, state or local tax penalties.
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Circular 230: this document was not intended or written to be used, and it cannot be used, for the purpose of avoiding U.S. federal, state or local tax penalties that may be imposed on the taxpayer.
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©2012 Kesselman & Kesselman. All rights reserved.
In this document, “PwC Israel” refers to Kesselman & Kesselman, which is a member firm of PricewaterhouseCoopers
International Limited, each member firm of which is a separate legal entity. Please see www.pwc.com/structure for
further details.
PwC Israel helps organisations and individuals create the value they’re looking for. We’re a member of the PwC network
of firms with 169,000 people in more than 158 countries. We’re committed to delivering quality in assurance, tax and
advisory services. Tell us what matters to you and find out more by visiting us at www.pwc.com/il
This publication has been prepared for general guidance on matters of interest only, and does not constitute professional
advice. It does not take into account any objectives, financial situation or needs of any recipient. Any recipient should not
act upon the information contained in this publication without obtaining specific professional advice. No representation or
warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication,
and, to the extent permitted by law, Kesselman & Kesselman, and any other member firm of PwC, its members,
employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you
or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision
based on it, or for any direct and/or indirect and/or other damage caused as a result of using the publication and/or the
information contained in it.
Thank you!
Alon Sherer, International Tax Manager, PwC Israel
03-7954520
