SALT Strategies

SALT Strategies

Updates & Commentary On State & Local Tax Law

Tax Havens – “Water’s Edge” Combined Reporting is Moving Further Abroad

Posted in Corporate Income Tax, Income and Franchise, Nexus

waters-edgeThe initial principle of “Water’s Edge” combined reporting was to require combined reporting for affiliated domestic companies that are engaged in a unitary business. Some states have added foreign companies to the Water’s Edge group. These are companies that have a limited United States presence (20% or more) as long as they are part of the affiliated group and engaged in a unitary business.

An even more recent trend is states pushing to include companies in Water’s Edge reporting whose affiliates are doing business in overseas “tax havens” – regardless of the amount of U.S. activity they have conduct. Over time, states have been pushing the envelope to make water’s edge less and less water’s edge.

Companies that are part of a Water’s Edge combined group all include their income and apportionment factors when calculating the particular combined state tax liability. In general, these combined groups have consisted of:


  • U.S. corporations included in a federal consolidated tax return
  • Corporations incorporated in the U.S.
  • Foreign corporations with a certain threshold of U.S. business activities (80/20 corporations)
  • U.S. corporations that have more than 50% of their voting stock owned or controlled by another U.S. corporation.

Lately, states like Washington DC, Florida, and Maine – just to name a few – have been adding affiliates engaged in a unitary business that are located in overseas “tax haven” countries to the Water’s Edge mix.

Tax havens can be defined as

  • countries that have tax rates lower than that of the U.S. by a certain threshold percentage
  • tax regimes that lack transparency, or are favorable for tax avoidance

As an alternative, a state’s laws may have a “blacklist” of countries that are considered tax havens. The countries in the states’ blacklists may overlap, to a certain degree, but are not exactly identical. The number of blacklisted countries/territories is in the dozens for most states, with the US Virgin Islands being among them. The intent of expanding water’s edge combined reporting appears to be to prevent multinational corporations from shifting U.S. earned income to these tax havens.

Opponents of these “expanded” groups argue that the states’ definitions of tax haven countries are too vague and violate the due process clause. They also argue that this practice taxes foreign source income that is statutorily excluded from U.S. state taxation. In addition, they argue that including these companies located in tax havens creates a substantial risk of multiple international taxation, which violates the Commerce Clause.

What can’t be argued is that more and more states including companies located in tax havens in their combined returns. As unfair as it may seem, tax practitioners need to be aware that it is happening.

Connecticut Law Boosts Tax Revenue from Multistate Corporations

Posted in Corporate Income Tax, Personal Income Tax, Sales and Use Tax

conneticutt_nutmeg_stateConnecticut is known as the “Nutmeg State” because its early settlers were considered ingenious and shrewd for recognizing the value of nutmeg and selling it to travelers.

Early this summer, the state lived up to its shrewd reputation when its General Assembly passed a budget bill containing provisions that would (among other provisions) increase tax revenue from multistate corporations that operate their businesses through separate entities.

On June 4, 2015, the Connecticut General Assembly passed House budget bill H.B 7061 (The New Law).  The New Law includes tax changes that would affect corporate income tax, personal income, and sales and use taxes.   A quick review of the law reveals a tried and true approach aimed at increasing the State’s corporate income tax revenue from multistate corporate taxpayers that operate their business through separate corporate entities.   In addition, the law may have ramifications on Connecticut personal as well as sales taxpayers.

Corporate Tax Provisions

Adopting Mandatory Combined Reporting

Effectively for tax year beginning on or after January 1, 2016, members of a group of companies that have common ownership, are engaged in a unitary business and have at least one company is subject to corporation income tax must file combined reporting. The taxpayer will be deemed to meet the definition of “common ownership” if :

“more than 50% of the voting control of each member of a combined group is directly and indirectly owned by a common owner or owners either corporate or noncorporate, whether or not the owners are members of the combined group.”

“Unitary business” will apply to a group of companies if the companies operates as “a single economic enterprise that is made up either of separate parts of a single business entity or of a group of business entities under common ownership, which enterprise is sufficiently interdependent, integrated or interrelated through its activities so as to provide mutual benefit and produce a significant sharing or exchange of value among such entities, or a significant flow of value among the separate parts.”

A combined group may make an election to have the combined group filed on world-wide basis or affiliated group basis.

Extending Corporate Income Tax Surcharge

The temporary 20% corporation income tax surcharge is extended for two years (through 2017). The surcharge will be reduced to 10% beginning on or after January 1, 2018.

Net Operating Loss Limitation

Beginning on or after January 1, 2015, the amount of net operating loss corporations may carry forward is limited to the lesser of

50% of current year net apportioned income, or
the excess of net operating loss over the NOL being carried forward from the prior year.
Tax Credit Limitation

Beginning on or after January 1, 2015, the amount of tax credit is reduced from 70% to 50.01%.

Personal Income Tax – Rate Changes

Beginning on or after January 1, 2015, the marginal tax rate is increased to 6.9% from 6.7%. For taxpayers whose income is more than $500,000 for single or $1M for married couples, the taxable income is subject to 6.99%

Trust and Estate Tax – Rate Changes

The trust and estate income tax rate is increased to 6.99% from 6.7%.

Sales and Use Tax

Effective July 1, 2015, the luxury goods tax rate is increased from 7 percent to 7.75 percent. Luxury goods include cars, jewelry, clothing or footwear costing more than certain amounts.





Is the U.S. Supreme Court Wynne Decision A Winner For You – Not Just For Maryland Residents?

Posted in Corporate Income Tax, Person Income Tax, Property and Other State/Local Tax Issues

maryland.sealIn a recent decision, the U.S. Supreme Court held that Maryland’s failure to allow a credit against the local portion of Maryland personal income tax for taxes paid to another state was unconstitutional.

The decision, Comptroller of the Treasury of Maryland v. Wynne, May 18, 2015, lay the groundwork for potential refund opportunities for residents other than Maryland, including New York City residents who have paid personal income taxes to other states on income that was also subject to New York City personal income tax.

Wynne Facts and Holding Summary

In a 5-4 decision, the Supreme Court in Wynne held that the failure of Maryland’s personal income tax provisions for residents to permit a credit against the County portion of the State’s personal income tax for taxes paid to other states on pass-through income from an S Corporation was unconstitutional.  It should be noted that the County portion of the Maryland’s personal income tax may be applicable to both residents as well as non-residents of the State.

Wynne Decision’s Potential Benefit To New York City Residents

New York City personal income tax provisions do not allow a credit for personal income taxes paid to other states.  For example, if a New York City resident pays California personal income tax on a portion of their income, New York City’s personal income tax provisions do not permit any credit for the tax paid to California.  Since California’s top tax bracket has consistently been higher than the top New York State tax rate, New York City residents are effectively paying the California tax on California source income plus New York City tax on the same income.  The New York State tax would have been eliminated by a partial credit of the California tax paid.


As in auto racing and life, timely action is the key to success.  We are closely monitoring New York’s response to the Wynne decision.  It  may prudent for taxpayers who are New York City residents to file protective refund claims for the appropriate credit for personal income taxes paid to other states that have higher tax rates than New York State (such as California).  In particular, the statute of limitations for those who may wish to pursue a refund claim should consider that the New York City personal income tax return statute for claiming a refund of 2011 taxes paid generally expires no later than October 15, 2015 for clients who extended their 2011 individual tax return.  Therefore, protective refund claims may be advisable prior to that time in order to preserve potential refund claims for the 2011 year.

Is Congress Breathing New Life into the Marketplace Fairness Act?

Posted in Nexus

stay_tunedAs we noted in several of our posts, adoption of the Marketplace Fairness Act would subject numerous remote vendors to sales tax nexus in states that they presently may not have any physical presence or nexus. The Marketplace Fairness Act has been a lightning rod with as many proponents as opponents. To date it has yet to be hammered into the law of our Land.

Earlier this year, we noted that Congress might pick up the thorny issue of long-arm sales tax nexus with the introduction of a new version of the Marketplace Fairness Act as well as a competing origin based alternative.

Avalara recently penned an incisive and well-written summary of where the issue stands now in Congress and with the interest groups who have a stake in the outcome.  Could 2015 finally be the year some version of the Act passes Congress and starts affecting your clients?

Stay tuned.


New York State Tax Department Switches Banks – Affecting Taxpayers with Debit Blocks on Their Accounts

Posted in Income and Franchise, Personal Income Tax, Property and Other State/Local Tax Issues, Sales and Use Tax

BankThe New York State Tax Department is switching banks – and that should make you sit up and take notice if you or your clients use debit block services to electronically pay one or more New York State taxes.

You only have until June 25, 2015 to contact your bank and have them add the new bank account information. If you don’t, your bank could reject your next payment and you may also get a bill from the state for the amount due – including penalty and interest.

Debit block services are employed to protect bank accounts from unauthorized electronic charges. Your bank will only permit and process authorized transactions.

If you are currently authorizing the NYS Tax Department to deduct payments from a bank account and there is a debit block on that account, you need to do the following:

  • Contact your bank to add the State’s new company IDs and names to the bank account.  The State asks that you not remove the old company ID.
  • Add the new information for each type of payment you make.  Each payment type, including unemployment insurance, has its own company ID and name.

Affected taxpayers should review the full memo on the NYS Website for full details.

And remember, these steps must be completed by June 25, 2015 for future payments to be successful.



Taxpayer “Victory” in Direct Marketing Case – But Multistate Retailers Shouldn’t Do the Snoopy Dance of Joy Just Yet

Posted in Sales and Use Tax

snoopyhappyIn a seeming victory for online retailers, the U.S. Supreme Court last week ruled that the Tax Injunction Act does not bar a retailer from bringing a suit in federal court. The suit originally brought by the Direct Marketing Association involved whether Colorado could force online retailers to report purchases made by their Colorado customers for tax purposes.

The Tax Injunction Act  holds that federal district courts are barred from hearing a state tax case  if the state courts could easily address the issue themselves. But the high court overturned an appeals court ruling that the TIA barred the district court from hearing the suit  regarding  Colorado legislation  HB10-1193. This law required “non-collecting retailers” with Colorado sales in excess of $100,000 to notify the State and the purchaser of the purchaser’s use tax liability.

While the high court ruling was a victory for online retailers, it may be premature to start doing Snoopy’s happy dance and multistate retailers should be cautiously enthusiastic. In his concurring opinion, Justice Kennedy appears ready to take on a larger issue that could strike even greater fear into the online retail community – in clear language, he indicates his desire to limit – if not overturn,  the Quill decision.

Key Take Away From the Court’s Decision

Justice Thomas’s opinions set forth several significant legal findings. First, the Court found that the Tenth Circuit’s finding that TIA barred DMA’s suit was incorrect. The Tenth Circuit’s determination that TIA was applicable to DMA’s suit versus Colorado was wrong due to the Tenth Circuit’s broad interpretation of the TIA’s term “restrain.”The Court held that by applying the Congressional intended interpretation to the TIA’s “restrain,” a suit against a state “cannot be understood to “restrain” the “assessment, levy or collection” of a state tax if it merely inhibits those activities.”

Secondly, it did not take a position on whether DMA’s suit might be barred under the “comity doctrine.” Justice Thomas’ decision, citing Levin v. Commerce Energy, Inc., 560 U. S. 413, indicates that the “comity doctrine” may bar DMA’s suit based on its principle that “counsels lower federal courts to resist engagement in certain cases falling within their jurisdiction.”  Thomas added that pursuant to this doctrine federal courts are to refrain from “interfer[ing] . . . with the fiscal operations of the state governments . . . in all cases where the Federal rights of the persons could otherwise be preserved unim­paired.” The Court left it to the Tenth Circuit to determine “whether the comity argument remains available to Colorado.”

Finally, Justice Thomas’ opinion indicates that the Court, in its ruling that the TIA does not bar DMA’s suit in federal district court, is not expressing a view “on the merits of” the case’s claims and “remand the case for further proceedings consistent with this opinion.”

Justice Kennedy’s “Concurrence” Should Concern Multistate Retailers

Justice Kennedy’s concurring decision provides a valuable window into at least one of the Justice’s desire to revisit the Court’s decision in Quill. As Justice Thomas notes in his opinion for the Court, it is in the Quill decision that the Court established the precedence that “under our negative Commerce Clause precedents, Colorado may not require retailers who lack a physical presence in the State to collect these taxes on behalf of the Department. See Quill Corp. v. North Da­kota, 504 U. S. 298, 315–318 (1992).”

Justice Kennedy’s concurring opinion stridently sets forth his view that Quill was “[A] case questionable even when decided…” and that Quill now harms the States “to a degree far greater than could have been anticipated earlier.”

Lucy_footballOne may wonder why Justice Kennedy felt it necessary to set forth his view on Quill in his concurring opinion to the Court’s decision in DMA. Especially since the Court’s decision in DMA expressly does not address DMA’s constitutional arguments against Colorado’s statute as set forth in the district court.

Justice Kennedy’s concurring opinion appears to tacitly provide an answer. In his opinion, he  discusses the concept of “stare decisis.” “Stare Decisis,”   as defined in Cornell University Law School’s Legal Information Institute website, is a concept based on the translation and interpretation of the phrase: “to stand by things decided.” Stare decisis is essentially the doctrine of precedent. Courts cite  stare decisis when an issue has been previously brought to the court and a ruling already issued. Generally, courts will adhere to the previous ruling, though this is not universally true.

Justice Kennedy’s opinion, citing Pearson v. Callahan 555 U. S. 223, 233 (2009), is that the Court’s adherence to the stare decisis is “weakened where “experience has pointed up the precedent’s shortcoming.”  Kennedy’s concurring opinion appears to be referring to Quill when he continues “It should be left in place only if a powerful showing can be made that its rationale is still correct.”

Justice Kennedy’s concurring opinion concludes with the following:

“The instant case does not raise this issue in a manner appropriate for the Court to address it. It does provide, however, the means to note the importance of reconsider­ing doubtful authority. The legal system should find an appropriate case for this Court to reexamine Quill and Bellas Hess.”

According to The Law Dictionary’s definition of “CONCURRING OPINION” as contained on its website, a concurring opinion is “an opinion that is given by another authority that is in agreeance and upholds the opinion of the first authority.”  Justice Kennedy’s “concurring opinion” in the Court’s decision in DMA appears to interpret the term “agreeance” quite broadly.

Caveat Emptor

The take away from the Court’s decision is ”caveat emptor” for both multistate retailers and those Colorado purchasers from “non-collecting retailers.” First, the Court’s decision is limited to its finding with respect to the TIA. Next, the Court’s opinion points the Tenth Circuit to revisit whether the “comity doctrine” bars DMA from bringing the suit in the federal district court. Finally, Justice Kennedy’s concurring opinion clearly indicates his desire to “reexamine Quill and Bellas Hess.” This taxpayer friendly decision should be viewed in context of the concurring opinion. In such context it is representative of a successful battle in a continuing conflict between the States’ desire for sales tax revenue and the current Constitutional limitations upon them.



Mid-Winter Nexus Clouds Gathering From the Great Lakes Region

Posted in Nexus, Sales and Use Tax

greatlakes.stormNew “click-through” nexus provisions in Michigan and Illinois are fresh cause for concern for out of state retailers – and should be on your Winter 2015 Sales and Use tax Nexus Preparedness Checklist.

Both states recently adopted new legislation that requires otherwise out of state retailers to collect and remit sales tax from their in-state customers.

First, on January 15th, 2015 Michigan, with the adoption of S.B. 658 and S.B.659, has enacted “click-through” and affiliate nexus. Michigan’s provisions are effective October 1, 2015.

Additionally, last August, Illinois Governor Quinn signed S.B. 352, Public Act 98-1089, that adopted “click through” nexus that became effective January 1, 2015. As highlighted below, Illinois FY 2015-07 provides valuable guidance on complying with Illinois’ revised “click through” affiliate nexus provisions.

The potential ease with which Michigan’s nexus presumptions may be found to be met warrants attention from multistate taxpayers, as well as their tax advisors. All multi-state taxpayer activities, as well as their affiliates’ activities, and agreements with Michigan vendors and advertisers should be reviewed in light of Michigan’s new nexus provisions.

Michigan “Click-Through” and “Affiliate” Nexus

Click-Through Nexus


Michigan’s legislation sets forth that a “seller of tangible personal property is presumed to be engaged in the business of making sales at retail of tangible personal property” in Michigan if as stated in the statute:

The seller enters into an agreement, directly or indirectly, with 1 or more residents of this state under which the resident, for a commission or other consideration, directly or indirectly, refers potential purchasers, whether by a link on an internet website, in-person oral presentation, or otherwise, to the seller, if all of the following conditions are satisfied:

(a) The cumulative gross receipts from sales by the seller to purchasers in this state who are referred to the seller by all residents of this state with an agreement with the seller are greater than $10,000 during the immediately preceding 12 months.

(b) The seller’s total cumulative gross receipts from sales to purchasers in this state exceed $50,000 during the immediately preceding 12 months.

Rebutting Click-Through Nexus Presumption

The presumption set forth above may be rebutted. The statute states that presumption may be rebutted “by demonstrating that the residents of this state with whom the seller has an agreement did not engage in any solicitation or any other activity within this state that was significantly associated with the seller’s ability to establish or maintain a market in this state for the seller’s sales of tangible personal property to purchasers in this state.”

The statute says an out-of-state retailer satisfies the rebuttal to the presumption by establishing the existence of both of the following:

(a) Written agreements prohibiting all of the residents with an agreement with the seller from engaging in any solicitation activities in this state on behalf of the seller.

(b) Written statements from all of the residents with an agreement with the seller stating that the resident representatives did not engage in any solicitation or other activities in this state on behalf of the seller during the immediately preceding 12 months, if the statements are provided and obtained in good faith.

Establishing and documentation of the aforementioned rebuttal requirements pose significant gauntlet for Multistate taxpayers as well as their tax advisors who may wish to rely on the rebuttal provisions to the “Click-Through” nexus presumption.


Engaging Michigan Advertisers May Not Create Presumption

Michigan’s click-through provisions indicate that agreements under which a seller purchases advertisements from a person or persons in Michigan to be delivered through television, radio, print, the internet, or any other medium will not be considered an agreement that creates the aforementioned presumption unless the ad revenue paid to the person or persons in this state consists of commissions or other consideration that is based upon completed sales of tangible personal property.

Affiliate Nexus


In addition, Michigan has enacted an “Affiliate Nexus” provision that casts a wide net of activities that will create a presumption of nexus.

The legislation states that a “seller who sells tangible personal property” will be presumed to have nexus, be required to register with the Michigan Department of Treasury and collect tax if the seller, including an affiliate person (other than a common carrier acting as a common carrier) engages or performs any of the activities contained within Michigan’s affiliate nexus provision.

The following excerpt from Michigan’s affiliate nexus provisions highlight some of the activities that may create nexus in Michigan – and could warrant close attention:

(d) Uses, with the seller’s consent or knowledge, trademarks, service marks, or trade names in this state that are the same or substantially similar to those used by the seller.

(g) Shares management, business systems, business practices, or employees with the seller, or in the case of an affiliated person, engages in intercompany transactions related to the activities occurring with the seller to establish or maintain the seller’s market in this state.

(h) Conducts any other activities in this state that are significantly associated with the seller’s ability to establish and maintain a market in this state for the seller’s sales of tangible personal property to purchasers in this state for storage, use, or consumption in this state.

The aforementioned activities within Michigan’s affiliate nexus provisions appear to accommodate aggressive interpretations of what activities may relate the presumption of nexus.

Who Is An Affiliated Person?

Michigan’s Affiliate Nexus provisions state that an “Affiliated person” is defined as either:

(i) Any person that is a part of the same controlled group of corporations as the seller.

(ii) Any other person that, notwithstanding its form of organization, bears the same ownership relationship to the seller as a corporation that is a member of the same controlled group of corporations.

The provision continues in defining the term “Controlled group of corporations” as meaning “that term as defined in section 1563(a) of the internal revenue code, 26 USC 1563.”

Rebuttal of the Affiliate Nexus Presumption

Michigan’s Affiliate Nexus provision state that the presumption may be rebutted by “demonstrating that a person’s activities in this state are not significantly associated with the seller’s ability to establish or maintain a market in the state for the seller’s sales of tangible personal property to purchasers in this state.”

The problem is that the state has not provided any guidance about how to determine this. Absent additional clarification or guidance, the criteria for rebuttal of this presumption may be subjectively and aggressively interpreted.

Illinois’ Second Bite At “Click-Through”/Affiliate Nexus Begins January 1, 2015

Illinois P.A. 1089 was enacted to address the 2013 Illinois Supreme Court decision in Performance Marketing Ass’n, Inc. v. Hamer, in which the Court found that Illinois’ click-through nexus provision was pre-empted by the Federal Internet Tax Freedom Act . It should be noted, as indicated on the Internet Tax Freedom Act Coalition website, that the ITFA, which bars state and local taxes on internet access, was extended a fifth time in December 2014 and is now scheduled to expire October 1, 2015.

Illinois FY 2015-07 sets forth Illinois’ revised “click-through” nexus provisions, effective January 1, 2015, expanded the “type of out-of-state retailers required to register in Illinois and collect and remit Use Tax.”  FY 2015-07 says out-of-state retailers may be eligible for a 30 day grace period with respect to the P.A. 98-1089’s effective date; i.e. February 1, 2015, if the out-of-state retailer fully complies with the Act’s provisions as of February 1, 2015.

FY 2015-07 states in part that:

Public Act 98-1089, 35 ILCS 105/2(1.1) and 35 ILCS 110/2(1.1), applies to out-of-state retailers and servicemen that satisfy the following criteria:

  • the out-of-state retailer has a contract with a person in Illinois;
  • under the contract, the person in Illinois refers potential customers to the retailer and the retailer pays to the person in Illinois a commission or other consideration based on the sale of tangible personal property by the retailer;
  • the person in Illinois provides to the potential customers a promotional code or other mechanism that allows the retailer to trace the purchases made by these customers;
  • the retailer made cumulative gross sales of $10,000 during the preceding four quarterly periods to customers referred by persons located in Illinois, regardless of the location of the customers.

If an out-of-state retailer satisfies all of the above, the retailer is “presumed to be maintaining a place of business in Illinois and is required to register, collect and remit Use Tax on all to Illinois customers.

 Illinois’ Irrebuttable Presumption – A Presumption Al Capone Would Be Proud Of

Illinois’ click-through presumption is not rebuttable. Illinois FY 2007-15 states that:

An entity can rebut the presumption that it is a retailer doing business in Illinois by presenting proof to the Department of Revenue upon audit that the persons in Illinois that referred customers to it had so little connection to Illinois that the nexus standards in the Commerce Clause of the U.S. Constitution prohibit imposing registration and collection requirements.

This indicates that an out-of-state retailer that satisfies the presumption must register, collect and remit the Use Tax and only upon being audited by Illinois Department of Revenue will it have the opportunity to successfully demonstrate that “the persons in Illinois that referred customers to it had so little connection to Illinois that the nexus standards in the Commerce Clause of the U.S. Constitution prohibit imposing registration and collection requirements.”

Michigan and Illinois Nexus Provisions – More Ominous Nexus Clouds

The winter of 2014-15 will probably be considered one of the most challenging and treacherous winters in the history of recorded U.S. weather reporting. Living in the Northeast, most of our winter’s difficult weather and storms this year, as usual, have originated near or around the Great Lakes region and headed east. Akin to the most powerful winter storms that develop over Michigan and Illinois, these State’s nexus provisions pose ominous nexus storm potential for multistate taxpayers and their advisors.

Salt Strategies’ First Year Anniversary

This month marks SaltStrategies First Anniversary. It has been an amazing time for all of us at SALTStrategies. We hope our posts have been insightful and thought provoking as well as informative.   Our first year taught us how demanding it is to achieve and maintain SALTStrategies’ goal of providing VALUE to our readers.

On behalf of Jennifer Dowd, Richard Feldman, Tracey Segarra and everyone at MWE that has made SALT Strategies possible, I wish to say Thank You to all of our readers.

I humbly invite all of you to continue to join us on our journey through the dynamic world of state and local tax exploration.

NYC Corporate Tax Reform – Mayor And Governor Seem To Be In Sync

Posted in Corporate Income Tax

Last month, New York City Mayor de Blasio announced his proposal for “a major reform” of the city’s corporate tax regime.   Considering that the mayor and New York State Governor Cuomo do not always see eye to eye (they held separate press conferences throughout  blizzard Juno, for example), the mayor’s proposal appears to closely parallel one already signed into law by the governor.

According to the Mayor’s Press Release, the proposed modifications to the city’s Corporate Code will result in “modernizing an outdated system, providing vital tax relief to the city’s small businesses and local manufacturers, and streamlining City and State corporate tax codes.”

An initial read of the proposed modifications set forth in the press release indicates that the Mayor’s modifications to the New York City Corporate Tax Code are in line with those adopted by Governor Cuomo that were signed into law last March as highlighted in our New York State Tax “Climate Change” – Higher Taxes Forecast for Multistate Taxpayers .

Key Aspects to Keep In Mind Regarding The Mayor’s Proposal

The Mayor’s Proposal calls for its changes to be retroactively effective to January 1, 2015.

The Mayor’s Proposal does not seek any modifications or modernization of New York City’s Unincorporated Business Tax.

As highlighted in the Mayor’s Press Release the “de Blasio administration’s corporate tax reform will be revenue-neutral on an aggregate basis …”.  

Significant Elements of the Mayor’s Proposal

As outlined in the release, here are some of the significant modifications that the Mayor’s Proposal seeks to implement,  a number of which closely correlate with those included in New York State’s 2014 Corporate Tax Reform:

  • Conforming the City tax code to State provisions in “the most important areas of tax computation, including updating the City’s corporate income tax and minimum tax codes to mirror the State codes.”
  • Adoption of a “new method for determining how corporations attribute net income”, “Market Based” sourcing –“based on where a firm’s markets are located, rather than the location of the business operations.”
  • Implementation of a “new method for computing net income that broadens the tax base by treating most income as business income.”
  • Merging the bank tax into the corporate franchise tax for corporations.
  • Adoption of unitary combined reporting rules.
  • Targeted relief for New York City’s small businesses and local manufacturers.
  • Excluding the first $10,000 of capital tax base.
  • Reducing the tax rate for small non-manufacturers with less than $1 million in allocated net income from 8.85 percent to 6.5 percent.
  • Reducing the tax rate for small manufacturers with less than $10 million in allocated net income from 8.85 percent to 4.425 percent.

Proposal’s Notable Distinctions

It should be noted that the Mayor’s Proposal will retain the alternative tax base on capital.  The Mayor’s Press Release indicates that the retention of the alternative tax based on capital “will help stabilize revenues in years of low profits for large corporations.”   

The release further indicates that the “[R]emaining eligible banks and corporations will be subject to a capital base with a $10 million tax cap.”  This reflects an increase from the current New York City Corporate capital tax base.

Why You Should Care

The Press Release indicates that the Mayor’s Proposal will closely parallel the recently enacted New York State Corporate Tax amendments.  There are several potential modifications that may have significant corporate tax ramifications.

Market Based Sourcing

The release indicates that Mayor’s Proposal contains a Market Based Sourcing provision.  Market Based Sourcing will most likely increase a corporation’s New York City receipt factor and New York City corporate tax if:

  • The corporation derives revenue from services
  • The corporation performs the services for which it is paid from location(s)  based outside of New York City; and
  • The corporation has a significant portion of its customer base in New York City,

Unitary Combined Filing

The release indicates that the Mayor’s Proposal contains a mandatory unitary combined filing provision.  This provision will affect corporations that may be a member of a unitary group that previously were filing on a separate return basis or filing on a limited combined group basis that did not include all of the members of the combined group.


The release indicates that the Mayor’s Proposal will be retroactive to January 1, 2015.  Therefore, any potentially affected corporation should consider the ramifications of the Mayor’s Proposals in the calculation of its New York City corporate tax estimates as well as its tax provision.

Mayor’s Proposal Warrants Multistate Corporate Taxpayers Preparedness

Last week, Mayor de Blasio issued repeated warnings regarding the potential dangers arising from the imminent arrival of Winter Storm Juno. Both Mayor de Blasio and Governor Cuomo acted quickly to minimize the potential harm Juno could wreak on the City and State – including shutting down New York City’s subway. 

After New York City was largely spared the wrath of the powerful storm, some expressed dismay of the Mayor’s conservative approach to preparation.  I, for one, thought that Mayor de Blasio’s and Governor Cuomo’s actions were wholly justified and prudent.  Their actions were evidence of their thoughtful leadership given the potential havoc and danger Juno posed to the City and State.

The preparedness reminded me of British statesman and novelist Benjamin Disreali, who wisely wrote “I am prepared for the worst but hope for the best.”


Posted in Sales and Use Tax

Bob_Goodlatte_OfficialIs the new Congress planning to alter some of the unpopular provisions of the 2013 Marketplace Fairness Act? It sure seems like it.

On January 13th, House Judiciary Chairman, Representative Bob Goodlatte, circulated a draft of the  Online Sales Simplification Act of 2015.  As reported in a Bloomberg BNA article, Goodlatte Turns to Origin Sourcing In New Proposal on Online Sales Tax, the draft seeks to adopt “a hybrid version of so-called origin sourcing” and a participating states’ distribution agreement to address the States’ online retailer sales tax concerns.

According to the article, a Judiciary Committee aide told the publication that OSSA is meant to “serve as a starting point for discussion on the Internet sales tax issue” and that Goodlatte welcomes feedback and new ideas.   The timing and intent of OSSA is well worth noting – both appear to be signs that the 114th U.S. Congress’ Judiciary Committee will take a different road than the one set forth in the 2013 Marketplace Fairness Act.

As we noted in our previous posts, The Marketplace Fairness Act Hearings – Why They Should Be On Your Radar and The Marketplace Fairness Act Hearings Highlight Diverse Solutions. Is the MFA The Answer to The Wrong Question, the MFA provisions affecting remote sellers have been a significant concern for online retailers.  Many of the MFA provisions have been meet with widely divergent comments by sales tax experts, industry groups and lawmakers.

OSSA Key Concepts

Like the MFA, OSSA attempts to address the issue of States’ lost sales tax revenue arising from their residents purchasing taxable items from out of state online retailers who are not registered to collect sales tax in their state. (It should be noted, the aforementioned residents should self-assess use tax on such purchases and remit that use tax to their resident states.) However, OSSA demonstrates a comprehensive departure from the approach set forth in the MFA as evident by its key foundational components.

OSSA relies on the implementation of two key critical foundational components – Origin Based Sourcing and Participating States’ Adoption of a Distribution Agreement- to resolve the States’ loss sales and use tax revenue from residents purchases from out of state online sellers.

Origin Based Sourcing

Unlike the MFA, OSSA does not try to require remote sellers to charge or collect sales tax based on the destination of the sale or location of the remote seller’s customer.  Instead, OSSA applies an origin based sourcing paradigm.  As set forth in the following excerpts from OSSA Section 2

Sec. 2: Limitation on Collecting Tax on Remote Sales

(a) A state may tax a remote sale only if it is the Origin state of the sale and party to the Distribution Agreement (i.e., the clearinghouse that nets out the $).

(b) Tax is applied at the Origin Rate (including local rate).

(c) Privacy Protection – No personally identifiable information is reported to the clearinghouse. Just the amount of the sale, destination state and (zip code). Exception is made for sharing, in the course of an audit only, “compliant taxpayer certificates” established in sec. 4.

(d) Sellers may be audited only by their home state taxing authority

 Distribution Agreement

OSSA’s second foundation concept is the adoption by participating states of a “Distribution Agreement” (i.e. Clearinghouse). The BNA Bloomberg article concisely summarizes the core aspects of OSSA’s Distribution Agreement.  First, OSSA calls for

“a commission, to be appointed by participating states, to determine the states’ shares of online sales tax revenue. Each origin state would forward each destination state its proportional share, based on a distribution agreement reached by the commission.”

The commission would craft a distribution agreement within 90 days of the panel’s creation. Each month, states would determine how much of the total tax imposed on remote sales is due them, based on sales attributable to that state under origin sourcing.”

As the Distribution Agreement is the backbone of OSSA, it would appear that states would have to “participate” or join in to the Distribution Agreement if they wish to collect tax on remote sales.

The following is an excerpt of some of the key provisions from Section 3 of OSSA:

Sec. 3: Distribution Agreement (i.e., Clearinghouse)

(a) Each State Governor appoints 4 representatives to a commission. At least one must represent remote sellers, the other three represent interests of government, consumers and non-remote sellers in the state. Commission produces a distribution agreement with the following terms:

3) Each Origin State forwards each Destination State its proportional share (determined in (2)) of the sales tax that the Origin State collected during the period via the proven clearinghouse method used in the Fuel Tax context.

4) States that do not join the Distribution Agreement cannot tax remote sales or receive distributions from the clearinghouse.

(b) Commission has 90 days to produce the agreement. After that, states cannot collect tax on remote sales at all (e.g., via aggressive affiliate nexus laws) until an agreement becomes effective.

 OSSA – One Strong Start Addressing Online Sales Tax

According to the House chairman circulates online sales tax draft article contained in THE HILL, OSSA is receiving attention from numerous groups.  One view expressed in the THE HILL article is that “{T}he draft is unlikely to find much support among retail groups that have lobbied for the Marketplace Fairness Act.” 

My initial view is more in line with that of Mr. DelBianco of NetChoice, as quoted in the article:

“With elegant simplicity, this bill treats sales tax obligations the same, whether you entered a store by foot, by mail, by phone, or via the Internet,” … “In short, this bill represents a compromise that gives states the revenue they’re missing, without punishing every small business that goes online to reach customers around the country.” 

In my humble opinion, Representative Goodlatte should be applauded for quickly introducing OSSA in the 114th Congress.  He should also be applauded for drafting OSSA’s strategic provisions that address the states’ sales/use tax concerns arising from online sales without compromising the Constitutional protections established under Quill. 

Multistate Tax ‘Nexus in Texas’ Alert – Comptroller Decision Sounds Sales Tax Warning For Software Providers

Posted in Nexus, Sales and Use Tax

stormsAs someone who regularly tunes into the Weather Channel, I keenly appreciate how meteorologists recognize dangerous patterns and potentially significant storms through analysis of weather hundreds of miles and days away from a location.  This ability to predict weather emergencies allow us to prepare and “batten down the hatches” well in advance of the dangerous weather.  Well, a recent Texas Comptroller’s decision that upheld a Texas ALJ Determination should be recognized by Multistate Tax meteorologists and prognosticators as a potentially dangerous nexus storm for all software providers.

In summary, the Comptroller’s Decision held that a Utah corporation had substantial nexus for sales and use tax arising from its Texas customers’ electronic downloading of software over which the Petitioner retained  “all property rights”  and title.

Comptroller’s Decision Key Facts and Findings

The Comptroller’s Decision was determined on the specific facts and findings pertaining to the Petitioner’s activities in Texas.  Undoubtedly any potential software provider or multistate tax advisor with clients who may be affected by this decision should undertake a comprehensive review of the decision’s specific findings and analysis.

However, I thought it would be helpful to set forth, in excerpt format, some of the key facts and findings contained in the Comptroller’s Decision as set forth in the decision’s “III. FINDINGS OF FACT” and “IV. CONCLUSION OF LAW”

  • Petitioner’s software and computer programs were deemed tangible personal property pursuant to Texas Tax Code Section 151.009.
  • Petitioner sold computer programs and digital content primarily over the Internet and via such common carriers as the U.S. Postal Service (USPS), the United Parcel Service (UPS), and Federal Express during the period under review.
  • Petitioner does not charge any ongoing maintenance or recurring licensing fees for any of its computer programs or digital images.
  • Petitioner does not charge customers for updates to computer programs they have already purchased, but does charge customers for upgrades from an older version of a program to a newer version.
  • The purchase and use of Petitioner’s products is governed by license agreements.
  • All the license agreements granted the customer (or user) a license that entitled them to use Petitioner’s products.
  • The user was either granted a personal non-exclusive, non-transferable license to use the 3-D Models, together with all accompanying written materials, images, and other data files or a license to use the product in accordance with the terms of the license.
  • The license agreements set no fixed period for the customer’s use of the license.
  • In some versions, the license agreements expressly provide that the license remains in effect only for so long as the user is in compliance with the terms and conditions of this agreement.
  • The products licensed under these License Agreements are provided for the user’s exclusive use.
  • The license agreements contain provisions specifically restricting the useof the products by third parties other than the user.

The Comptroller’s Decision also reviewed Petitioner’s other limited activities in Texas.  The Comptroller’s Decision did not find that Petitioner had established sufficient physical presence by its employees’ attendance of a week long education conference in 2002.

Nor did the Comptroller’s Decision find that a Petitioner employee’s attendance at a 2009 Texas conference provided sufficient physical presence in Texas to establish sales and use tax nexus.  It should be noted that the Petitioner was successful in establishing that its employee in 2009 “did not engage in any activities related to developing or promoting Petitioner’s sales. He did not sell, deliver or take orders for Petitioner’s products during his attendance at the conference. He did not visit any of Petitioner’s customers or vendors, offer technical support, or hold any outside meetings related to Petitioner’s business.”

 “Prepare for the Worst” Is Best Advice for Storms and Nexus

The Comptroller’s Decision should sound Texas Nexus Storm warnings to all software firms that are not presently registered  as a vendor for sales and use nor filing Texas sales and use tax returns.   This Decision sets forth the Comptroller’s view of what constitutes substantial nexus for sales and use tax in the context of companies that license the use of their software to customers located in Texas or to customers that may use their software in Texas.  My advice?  Prepare for a “blizzard” and be happy if you only receive  a “dusting” with respect to nexus.  But be mindful,  because for nexus in Texas a “dusting” may just be enough.