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What’s Happening Friday November 30, 2012. Doug Lindholm & William McArthur Council on State Taxation Tyco Electronics Fred Marcus Principal, Horwood,

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Presentation on theme: "What’s Happening Friday November 30, 2012. Doug Lindholm & William McArthur Council on State Taxation Tyco Electronics Fred Marcus Principal, Horwood,"— Presentation transcript:

1 What’s Happening Friday November 30, 2012

2 Doug Lindholm & William McArthur Council on State Taxation Tyco Electronics Fred Marcus Principal, Horwood, Marcus, and Berk, Chtd. Matt Lauer Ginny Buckner Kissling Principal, Ryan, LLC Savannah Guthrie Hosted by & Chris Matthews & David Gregory with

3 Program Overview Dale Busacker, Minnesota Pat Van Tiflin, Michigan Scott Reiber, California Jack Harper, North Carolina Mark Eidman, Texas Fred Nicely, Ohio

4 Program Overview Jason Wyman, Illinois Jonathan Block, Maine / New Hampshire Jason Zorfas, Massachusetts Dick Genetelli, New York David Shipley, Pennsylvania / New Jersey

5 NEWS BREAK Presented by & Todd Lard Council On State Taxation Jack Trachtenberg Sutherland Asbill & Brennan LLP

6 F EATURING S PECIAL G UESTS : Mr. Mark Eidman Partner Ryan Law, LLP Austin, Texas Mr. Fred Nicely Tax Counsel Council On State Taxation Washington, DC

7 F EATURING S PECIAL G UESTS : Mr. Jason Zorfas Executive Director, State and Local Tax Ernst & Young LLP Boston, Massachusetts Mr. Richard Genetelli President The Genetelli Consulting Group New York, New York Mr. David Shipley Partner McCarter & English, LLP Philadelphia, Pennsylvania

8 PowerPoint Presentation To access this presentation, go to:

9 Minnesota Developments Mr. Dale Busacker Director, State and Local Taxes Grant Thornton LLP Minneapolis, Minnesota

10 2012 Legislative update Both the House and the Senate were controlled by Republicans and the Governor is a Democrat. The two major tax bills, HF 2337 and HF 247 were vetoed. These bills had contained an increase in the research credit percentage and an upfront sales tax exemption for the purchase of capital equipment.

11 Express Scripts – Tax Court decision Issue 1 – The taxpayer was not in a unitary business relationship with its one-third owned Minnesota joint venture partnership because of the lack of a flow of value or sufficient control. Issue 2 – The law does not require the apportionment of the IRC Section 382 limit on the use of NOL carryovers.

12 Corporate income tax nexus 1. Skagen Designs – The Tax Court held that the activities of merchandisers exceeded the solicitation of orders when they provided training sessions to retail store employees and when they prepared store reports, photos, and floor maps. These merchandisers were not responsible for selling any Skagen products. 2. Cambell Soup – Pending before the Tax Court. Campbell Sales asserts that it does not have income tax nexus with Minnesota. The DOR asserts that Sales' employees exceed the protection of PL 86-272 when they analyze sales data, conduct post-event analysis to determine return-on-investment on promotional events, and when they conduct team building and development plan activities. The DOR also asserts that Sales has "flash title" nexus to inventory in Minnesota because title to the property is briefly transferred to Sales before the property is sold to the customer.

13 Residency litigation Tax Court decided that these individuals were still domiciled in Minnesota 1. Larson. Taxpayer maintained that he moved to Nevada. During the years 2002 – 2006 he spent between 126-169 days in Minnesota while spending between 35-74 days in Nevada. 2. Mauer. This taxpayer is an NBA referee who maintained that he moved to Florida. However, the taxpayer spent significantly more days in Minnesota than he spent in Florida, his travel to and from NBA games was from Minnesota, and he spent his summer vacation months in Minnesota. Pending before the Tax Court 3. Zavadil. These taxpayers maintain that they moved to Nevada. However, they spent more time in Minnesota than they spent in Nevada.

14 Pending Litigation SAP Retail, Inc. SAP sold $11.5 million of prewritten software to Best Buy along with $7 million of consulting and professional services. The Department assessed sales tax on these services as fabrication labor or as installation charges. The Department exempted invoices where the software code was modified. SAP's position is that these services are exempt consulting and professional services. SAP especially objects to the Department assessing tax on reimbursements that it received from Best Buy for expenses that its employees paid for airfare, car rental, hotel charges and meals.

15 Potential Gillette issue In 1983, the Legislature adopted the MTC Compact. Minnesota then allowed business taxpayers to elect to use equally weighted three factor apportionment or to apportion income based on 70% sales, 15% property, and 15% payroll. Minnesota also used cost of performance to determine the sales factor for services. The 1987 Legislature repealed Articles III and IV of the MTC Compact and repealed the election to use the equally weighted three factor apportionment formula The 1988 Legislature adopted market based sourcing for the sales factor for services.

16 Michigan Developments Mr. Patrick Van Tiflin Partner Honigman, Miller, Schwartz, and Cohn LLP Lansing, Michigan

17 MTC ELECTION MBT – IBM 11-20-12 SBT – Is it an Income Tax?

18 Michigan Corporate Income Tax Unitary Business Group Definition differs from MBT definition Only includes “C” corporations, insurance companies or financial institutions –Does not include a “foreign operating entity,” –defined same as under MBT

19 SBT Apportionment Cost of Performance TPP vs SVC – Mixed Transactions Sales Representation Population Factor Destination Unitary Business Principle

20 Michigan Corporate Income Tax Nexus – Three Statutory Tests Physical presence of more than one day during the tax year, or Active solicitation of sales in Michigan and $350,000 or more in gross receipts sourced to Michigan, or An ownership interest or beneficial interest, either direct or indirect in one or more a flow-through entities that has substantial nexus.

21 Timeline Many SBT Tax Years Open MBT Audits Only Recently Begun MBT Tax Years Open as Late as 12/31/2016 SBT SBT MBT MBT MBT MBT CIT 12/31/06 2/31/07 12/31/08 12/31/09 12/31/10 12/31/111/1/12 -12/31/12

22 California Developments Mr. Scott Reiber Morrison & Foerster LLP San Francisco, California

23 The Gillette Company v. FTB Several taxpayers filed suit arguing that, because California was a signatory to the Multistate Tax Compact, taxpayers were permitted to elect to use the Compact’s three-factor apportionment formula, as opposed to California’s formula with a double-weighted sales factor The trial court sustained the FTB’s demurrer on the basis that California’s double-weighted formula was intended to take away the taxpayers’ option to use the standard three-factor formula California law stated that the double weighted formula applied “notwithstanding Section 38006 [the Compact]”

24 The Gillette Company v. FTB Key Findings of Court of Appeal The Compact is a valid multistate compact that is binding on member states The Compact permits taxpayers to elect to apportion and allocate income in accordance with Article IV of the Compact California may only withdraw from the Compact by enacting a statute repealing the Compact, and the repeal must be prospective in nature The Compact may not be repealed piecemeal

25 The Gillette Company v. FTB Petition to California Supreme Court The Franchise Tax Board recently filed a petition with the California Supreme Court It again alleged that the “notwithstanding” language enacted in 1993 repealed the election under the Multistate Tax Compact The FTB also argued that doing so did not violate the Contracts Clause or the Reenactment Rule The FTB noted that the Court of Appeal’s decision would cost the state over $750MM If applied to other provisions in the Compact, it could be significantly more. The FTB also noted that other states are watching

26 The Gillette Company v. FTB Senate Bill 1015 On June 27, 2012, the Legislature passed SB 1015 prospectively repealing the Compact The Legislature declared that any election to use the Compact’s three-factor formula had to be made on an original return under the “doctrine of elections” This would preclude taxpayers from filing amended returns for past years to elect to rely on the Compact Is SB 1015 valid?

27 The Gillette Company v. FTB Proposition 39 The California voters recently passed Proposition 39, which imposes mandatory single-sales factor apportionment in California beginning in 2013 This was described to voters as closing a tax loophole When using the single-sales factor apportionment formula, taxpayers must also use market-based sourcing Thus, for tax years 2011 and 2012 California has an elective single-sales factor formula, and for tax years 2013 and beyond California has a mandatory single-sales factor formula

28 The Gillette Company v. FTB Potential Impact if the Court of Appeal Decision Stands and SB 1015 Is Invalid For prior years, taxpayers can file amended returns relying on the three-factor formula in the Compact These claims may be denied if the election needed to be made on an original return For 2012, taxpayers may use either: (1) a formula with a double-weighted sales factor; (2) a single-sales factor formula; or (3) the standard three-factor formula For 2013 the double-weighted sales factor option has been removed However, the FTB has issued guidance indicating that it plans to apply the 20% Large Corporate Understatement Penalty if the taxpayer’s position is later found to be incorrect

29 Dicon Fiberoptics v. FTB California law permits taxpayers to take a credit against franchise taxes with respect to a portion of wages paid to certain disadvantaged workers (“qualified employees”) employed in designated enterprise zones Taxpayers were generally required to provide information to a local vouchering agency, which would then certify that employees were “qualified employees” The vouchers stated that only the first page, and none of the underlying information provided to the agency, was to be returned to the taxpayer

30 Dicon Fiberoptics v. FTB In Dicon, the FTB later audited the taxpayer, and, despite receiving copies of the vouchers, required the taxpayer to provide additional information proving the employees were “qualified employees” The Court of Appeal held that the vouchers themselves were prima facie evidence that the employees were “qualified employees” Therefore, the burden was on the FTB to prove that the employees were erroneously vouchered.

31 Dicon Fiberoptics v. FTB The California Supreme Court reversed, finding: The vouchers were not prima facie evidence The FTB could require the taxpayer to prove that the worker was a “qualified employee,” even though the taxpayer had received a certification that this was the case several years earlier This was based on the FTB’s general authority to audit returns and obtain information from taxpayers and a statute indicating that the FTB was not bound by the decision of another agency The California Supreme Court believed that the vouchers were just another requirement to obtain the credit, and had no other value to the taxpayer.

32 General Mills v. FTB California Court of Appeal originally held that hedging receipts had to be included as “sales” in the standard apportionment formula On remand, the trial court agreed with the FTB that: Hedging was qualitatively different from General Mill’s principal business Including the hedging receipts resulted in substantial quantitative distortion The Court of Appeal upheld the decision of the trial court, albeit on grounds not raised by the FTB or the trial court

33 General Mills v. FTB Under the qualitative analysis, the Court of Appeal declined to follow the legal analysis applied in the treasury function cases Rather, it concluded that alternative apportionment was equally applicable where the taxpayer did not have a direct profit motive for the sales at issue Under the quantitative analysis, the Court of Appeal relied primarily on comparisons of profit margins, concluding that there was sufficient quantitative distortion in General Mills ’ case

34 Potential Impact of General Mills The Court of Appeal’s newly-minted paradigm appears to permit the use of an alternative formula anytime the taxpayer does not have a profit motive for a particular sale Such sales would violate the qualitative test under the Court of Appeal’s decision Such sales would generate no profit margins, and would therefore also violate the quantitative test under the Court of Appeal’s decision This may permit both the FTB and taxpayers to exclude a number of sales from their apportionment formulas Other Types of Hedges Loss Leaders

35 Potential Impact of General Mills The Court of Appeal’s decision may also impact alternative apportionment analyses more generally It indicated that the qualitative analysis and quantitative analyses were not independent tests It implied that, in addition to the treasury function paradigm and the “no profit intent” paradigm, there may be other paradigms that require alternative apportionment It noted other concerns that it considered, including the existence of “nowhere income,” the need for state uniformity, and the total amount of tax at issue in the case (in General Mills’ case, “millions of dollars” for the period at issue)

36 North Carolina Developments Mr. Jack Harper Senior Director Domestic Tax Planning & Policy Wal-Mart Stores Inc. Bentonville, Arkansas

37 History of Combined Returns in North Carolina December, 2007 Wal-Mart Stores East Inc. et al. v. Hinton ; 06-CVS-3928; 06-CVS- 3929 (December 31. 2007) May, 2009 North Carolina Court of Appeals upholds Wal-Mart Stores East Inc., v. Hinton, 676 S.E. 2d 634 (N.C. App.) app. withdrawn by taxpayer, 363 N.C. 748 (2009) 2009 through 2010 NC DOR implements several “Voluntary Compliance Programs”. Collects around $300 million.

38 History of Combined Returns in North Carolina January, 2011 Delhaize America Inc., v. Lay ; 06-CVS-08416 (January 11, 2011) June, 2011 HB 619 (Session Law 2011-390) enacted. Repeals statutes G.S. 105-130.6; G.S.105-130.15 and G.S. 105-16. New statute G.S. 105-130.5A adopted. NCDOR can force combination if a corporation’s intercompany transactions either: Lack economic substance, or Are not conducted at FMV (using a sec. 482 standard) Two prong test is used to determine if transactions lack “ Economic Substance ”. Reasonable business purposes other than the creation of tax benefits. Economic effects other than creation of tax benefits.

39 History of Combined Returns in North Carolina September, 2011 SB 580 (Session law 2011-411) revised the effective date for the repeal of (G.S. 105-130.6; G.S.105-130.15 and G.S. 105-16) to “tax years beginning on or after January 1, 2012”. November, 2011 Corporate Directive CD-11-01 was issued by the NCDOR. January, 2012 Taxpayer Groups (NC Chamber of Commerce, NC Retail Merchants Association, and COST) write letter to legislature contending that Directive CD-11-01 is not clear. April, 2012 The Department issues two new Directives (CD-12-01 and CD-12-02).

40 History of Combined Returns in North Carolina June 2012 SB 824 (Session Law 2012-43) was enacted requiring the NCDOR to expeditiously adopt formal rules for using its authority to require forced combined returns. SB 824 placed the 2012 Directives on hold awaiting the DOR to implement new rules on forced combination under G.S. 105-130A. No forced combination allowed for years after 2012 until rules are adopted. August 2012 North Carolina Court of Appeals rules against Food Lion. Delhaize America Inc. v. Lay; No. COA11-868, No. 07 CVS 20801. October 2012 The Department issues proposed rules on forced combination, solicits comments, and schedules public hearing for November 28, 2012.

41 F EATURING S PECIAL G UESTS : Mr. Mark Eidman Senior Partner Ryan Law, LLP Austin, Texas Mr. Fred Nicely Tax Counsel Council On State Taxation Washington, DC

42 Texas Franchise (Margins) Tax Allcat (2011) – TX S.Ct. held that the margins tax was not imposed on the net income of natural persons (i.e., not an income tax) In re Nestle USA, Inc. ( TX S.Ct. Case No. 12- 0518, writ of mandamus ) – Argument that Margins Tax violates U.S. and Texas Constitutions (e.g., not equal and uniform) Texas

43 Texas Franchise (Margins) Tax Nestle (cont.) Mandamus relief denied on October 19, 2012 Justice Hecht opinion – upheld the 1% rate applied to manufacturers as equal and uniform and rationally related to the privilege of doing business in Texas. No violation of Commerce Clause because tax is based on activity, not location. Justice Willett dissent – Court lacks original jurisdiction, not conferred in Texas Const. or Tax Code. Texas

44 Texas Franchise (Margins) Tax Comptroller Policy Change Effective June 2012, taxpayers may amend franchise tax reports to change their election, or to make an election, to use the Cost of Goods Sold (“COGS”) or the compensation deduction. Resulting from Taylor & Hill, Inc. v. Combs, et al. (Cause No. D-1-GN-10-004429), July 7, 2011 Texas

45 Texas Franchise (Margins) Tax Newpark Resources, Inc. v. Combs (Cause No. D-1-GN-11-002205) –Judgment for Plaintiff – Newpark Environmental Services, LLC could deduct certain expenses relating to disposal and reclamation services performed at oil and gas wells as COGS. –Comptroller filed Notice of Appeal on August 1, 2012 Texas

46 Texas Franchise (Margins) Tax Nextera Energy Power Marketing, LLC v. Combs (Cause No. D-1-GN-12-001372) –Whether certain expenses relating to the generation, transmission, and distribution of electric energy are deductible as COGS. –Processing tangible personal property v. service –Discovery phase Texas

47 Texas Franchise (Margins) Tax Graphic Packaging Company v. Combs (Cause No. D-1-GN-12-003038) Texas adopted MTC apportionment in Tax Code, Chapter 141 – This was not considered when Chapter 171 was amended to impose Margins Tax. Graphic Packaging argues they can choose single or three-factor apportionment because Margins Tax is based on income. Texas

48 Texas Sales and Use Tax Amazon settlement – Amazon agreed to start collecting Texas sales tax July 1, 2012, create 2,500 jobs, and invest $200M Texas

49 Texas Sales and Use Tax Roark Amusement (plush toys – sale for resale as part of a taxable service) Argued before TX S. Ct. on October 15, 2012 Proposed Rules Modifications to Rule 3.325 re: Refund Claims Letter Ruling Requests (no longer anonymous) Texas

50 Grocers Assoc. et al. v. Wilkins –Ohio Supreme Court held that the CAT is akin to a “franchise tax” and accordingly the measurement of the privilege may include non-taxable items such as food Beaver Excavating v. Levin –CAT on motor fuel upheld (thus far) –TP appealed to Ohio Supreme Court on 9/9/11 –Court accepted discretionary appeal and oral arguments presented on 7/11/2012 L.L. Bean, Inc. Final Determination (issued 8/10/2010) –Asserting Ohio has the ability to impose the CAT on a taxpayer lacking a physical presence in the state –Case is now pending before the Ohio Board of Tax Appeals –Tax Department has issued several FD’s on this issue CAT Litigation Ohio

51 Additional CAT Litigation Who is the Common Owner – CGI Holdings, LLC (FD issued 2/29/2012) – seeks consolidated elected taxpayer group status to exclude intercompany receipts –Law states “owned or controlled” but a regulation uses “owned and controlled” that is focused on voting rights – not ownership interest NOL Credit Cases –Must have an Ohio NOL of at least $50 million – cases pending on what happens if NOL subsequently adjusted below $50 million CAT Allocation v. Apportionment – DIRECTV, Inc. (BTA Case 2011-522) –Refund request based on CAT not being “fairly apportioned” – CAT receipts are technically taxed based on taxable situs Ohio

52 Ohio CAT – Revenue CAT had 3 Statutory Measurement Periods – none required adjustment to CAT (only if over collects) Actual Collections – 1 st Measurement Period : –FY 2006-07: $868.3M - Target: $815M [+ 6.5%] Actual Collections – 2 nd Measurement Period : –FY 2009: $1.18B - Target: $1.19B [-1%] Actual Collections – Final Measurement Period : –FY 2011: $1.45B - Target: $1.61B [-10%] CAT collected $1.66B for FY 2012 – Target: $1.5B [+10.7%] Ohio

53 Administrative CAT Compliance Update Voluntary Disclosure Agreements (VDAs) - Information Release CAT 2008-01 – Revised September 2010 –Allows VDA for CAT –Interest only – no penalties (as long as taxpayer never contacted via audit/compliance) and 3-year look back period (plus current year) CAT Division’s Nexus Unit –Has sent over 14,000 letters/notices –55% penalty if assessment issued plus $1,000 failure to register penalty General Amnesty - 5/1/2012 to 6/15/2012 –Over 300 taxpayers applied for CAT amnesty netting $10 million in additional tax (figure is just for the CAT) Ohio

54 2012 CAT Legislation Sub. H.B. 508 - Effective Sept. 4, 2012 –$1 million exclusion can be taken in first quarter until used – no longer $250,000 per quarter –Certain non-qualified insurance companies (surplus lines insurance) not subject to the CAT This is likely to address the possibility of the CAT being imposed on subsidiaries of insurance companies in the future –Misc. sales tax changes for Ohio to conform to the SSUTA – Pending Bills –S. B. 278 – credits to hire unemployed & provide broadband services in rural areas –H.B. 494 – $2,000 credit to hire veterans Ohio

55 Financial Institution Tax Reform H.B. 510 – Passed House & Pending in Senate –Banks (FIs) and Dealers in Intangibles (DITs) currently taxed on net worth basis (FI – 13 mills & DIT 8 mills) –Proposal to broaden the base using capital reported to the Federal Reserve Board $200 million or less of apportioned NW – 8 mills $200-$1.3 billion of NW – 4 mills NW above $1.3 billion – 2.5 mills –Compromise with DITs – DITs not affiliated with an FI will be subject to CAT in the future (most interest and capital gains are excluded from the CAT) –Bill is likely to pass before end of this year –CAT exemption for subsidiaries of insurance companies will likely be phased out –$200 million target for 2014 – rate adjusted if below by 10% Ohio

56 Municipal Income Tax Reform H.B. 601 –Over 500 local governments in Ohio impose a tax on the income earned from businesses, workers and residents located within their jurisdictions –Most intangible income is excluded –Fairly significant changes made in 2003 – more needed Uniform interest rate – same rate used for state taxes Uniform combined/consolidated filing procedures Uniform treatment of NOLs Uniform statute of limitations Create municipal tax policy board to establish statewide forms/rules –Bill will likely not pass this year – very likely to see reintroduction and movement next year Ohio

57 Potential Tax Proposals Next Year FY 2014/2015 Budget –Governor’s proposed budget will likely focus on personal income tax rate reduction – highest rate presently 5.9% –Revenue Loss Offsets: Sales Tax –Current exemptions likely to be scrutinized –Base broadening to subject additional services to tax Severance Tax –Hydraulic fracturing of shale is occurring in Ohio –Governor Kasich proposed an increase in severance tax on oil and gas from shale wells –Ohio General Assembly did not act this year – may be taken up next year Ohio

58 Ohio’s Use Tax Amnesty Program Current Use Tax Amnesty Program – 10/1/2011 to 5/1/2013 –Companies that enter the program must agree to remit all use taxes incurred since January 1, 2009 to amnesty filing –Waiver of interest & penalties and prior periods liability forgiven –Taxpayer can enter into payment plan –Caution – amounts paid are nonrefundable –$17 million in use tax amnesty collections thus far –Is this the longest amnesty program in history? Ohio

59 Ohio BTA Reform Still on the Menu Ohio Board of Tax Appeals still has a backlog –Unfortunately, many of the cases being decided are merely dismissals –H.B. 505 introduced this year is on hold –Ohio State Bar Association is trying to move legislation Proposed changes: –Creation of a small claims process – cases <$10,000 (voluntary & not appealable) –Provide additional funding for BTA –Allow appeals to be filed through the Ohio Business Gateway –Require the Tax Commissioner and BORs to electronically file transcripts –Development of a formal case management program –Adoption of uniform rules of practice and procedure for BORs –Ability to raise additional issues

60 Illinois Developments Mr. Jason Wyman Partner Deloitte Tax LLP Chicago, Illinois

61 P.A. 97-1129 – Tax Tribunal Organized separate and independent from Department of Revenue Effective July 1, 2013 Informal Conference Board enhancement Department of Revenue matters excluding exemptions Illinois — Legislative Action

62 P.A. 97-0905 – Enterprise Zones Initial enterprise zones set to expire 2012 Zones expiring through July 1, 2016 extended through July 1, 2016 Enterprise zone benefits include: Income tax incentives Sales tax incentives Utility tax incentives Addresses zones set to expire Income tax jobs credit, dividend deduction and interest deduction for financials are eliminated Building materials sales tax exemption is modified Illinois — Legislative Action – Cont'd

63 P.A. 97-0688 – Income Tax Credit – For-Profit Hospitals Appears transferrable Can it be bought/sold? P.A. 97-0767 – Wage Credit – Unemployed Veterans 20% of wages Tax Years after 12/31/12 and before 12/31/16 P.A. 97-0749 – Department of Commerce and Economic Opportunity required to disclose terms of future Illinois EDGE Credit agreements Illinois — Legislative Action – Cont'd

64 P.A. 97-0976 – Sales tax revenue sharing agreements must be made public and filed with Department of Revenue. P.A. 97-1074 – Increase to criminal tax penalties, notably “sales tax evasion” SB 282 – Corporate Tax disclosure for public corporations Cook County – Use tax on Non-Titled Tangible Personal Property Illinois — Legislative Action – Cont'd

65 Performance Marketing Association v. Hamer, Circuit Court of Cook County, No. 2011 CH 26333 (May 7, 2012) – Violates Commerce Clause and preempted due to federal moratorium on discriminatory states taxes on electronic commerce pursuant to Internet Tax Freedom Act – P.A. 96-1544 provided “click-through” nexus – Summary Judgment in favor of plaintiff, court did not enjoin enforcement of statute Illinois Click-Through Update

66 Metropolitan Life Insurance v. Hamer, 2012 Ill. App. 1 st 110400 – Illinois 2003 Amnesty – pay taxes without penalty or interest; however double penalties and interest for payments after Amnesty period – Federal Audit finalized in 2004 for period covered by Amnesty – DOR assessed double penalty and interest – Taxpayer prevailed Litigation

67 Marriott International Inc. v. Hamer, 2012 Ill. App. Ct 1 st 111406 – Similar facts to Metropolitan Life – IRS began audit after Amnesty ended for periods covered by Amnesty program – Company still had an obligation to accurately report taxable income including amounts “properly reportable” Litigation

68 Clarcor, Inc. v. Hamer, 2012 Ill. App. Ct 1 st 111674 – Filtration and packaging business units unitary – Centralized cash management, common pension, 401(k) and health insurance plans AT&T Teleholdings v. Illinois Department of Revenue, (June 1, 2012), 2012 IL App (1 st ) 110493-U – Capital Loss Carryback originating from combined return may be carried back to separate return year. Litigation

69 Witte Brothers Exchange, Incorporated v. Illinois Department of Revenue, Case No. 11-L-50282 (February 16, 2012) – Pass through miles not includible in numerator of sales apportionment factor Panhandle Eastern Pipeline Company v. Illinois Department of Revenue, Circuit Court of Cook County, Case No. 09-L-051281 – Natural gas transported through Illinois as part of an interstate journey not includible in numerator of sales apportionment factor for years at issue Litigation

70 Hartney Fuel Oil Company v. Hamer, (September 17, 2012), 2012 IL App (3rd) – Local sales tax reporting jurisdiction for fuel tax sales – Hartney accepted and approved orders in jurisdiction with no local sales tax – Prior audit files destroyed by DOR, therefore not relied upon in current decision Illinois Home Rule Updates –Litigation

71 Maine / New Hampshire Developments Mr. Jonathan Block Partner Pierce Atwood LLP Portland, Maine

72 Maine Board of Tax Appeals 3 Person Citizen’s Board Established Ex Parte Communications Prohibited Settlements Encouraged De Novo Review to Board, then De Novo Review to Superior Court Staffed by Independent Hearing Officers who Recommend Decision to the Board

73 Aircraft Use Tax Maine program of assessing 5% use tax on aircraft landing in Maine Two test cases decided by the Maine Supreme Court Exemption for property purchased and used outside of the State during first 12 months of ownership Maine Supreme Court held in 2011 that use tax must be thrown out if aircraft was substantially used outside the State.

74 Aircraft Test Cases Blue Yonder v. STA :Present in Maine 21 days. No use tax Victor Bravo v. STA : Present in Maine 156 days. Use tax upheld Mile High Air v. Assessor (2012) In Maine for parts of 87 days; outside of Maine entirely for 278 days during first year of ownership Superior Court held exempt from use tax

75 Use Tax Compliance Program Repeat of earlier successful amnesty program Runs in October and November, 2012 Applies to unassessed use tax Taxpayer agrees to pay use tax only for highest 3 years out of last 6 years (2006 through 2011) Taxpayer absolved of tax liability and interest for all other years, and absolved of civil and criminal penalties

76 NH Proposed Constitutional Amendment Amendment would prohibit taxes on income earned by a natural person other than taxes in effect on January 1, 2012 or adjustments to the rate of such taxes. Result?

77 Appeal of Seabrook Property Tax Exemption for Pollution control equipment Containment systems and other systems designed to prevent release of radiation did not qualify for exemption 15 other pieces of equipment did qualify Reason: facility must actively or routinely treat pollution vs. operating only in abnormal conditions Loss of cooling accident was merely speculation

78 F EATURING S PECIAL G UESTS : Mr. Jason Zorfas Executive Director, State and Local Tax Ernst & Young LLP Boston, Massachusetts Mr. Richard Genetelli President The Genetelli Consulting Group New York, New York Mr. David Shipley Partner McCarter & English, LLP Philadelphia, Pennsylvania

79 Massachusetts – Unitary Developments No major statutory or administrative changes Unitary audits beginning Letter Ruling 12-9 – HMO can be included in unitary return and is not an excluded insurance company Starting with 2011 returns separate net worth / property tax of unitary members is reported on unitary return Application of Economic Nexus to Foreign Corporations for Purposes of the Non-Income Measure MA

80 Massachusetts – Cloud Computing / SAS Guiding Principles true object test who controls the use of the software? is there actually a license of software? impact if an applet is provided? MA

81 Massachusetts – Negligence Penalty Guidance G.L. Chapter 62C, s. 35A imposes penalty for understatements of tax greater than 10% Working Draft Directive 12-xx (10/5/12) explains exceptions Reasonable cause / good faith exception Substantial authority and/or adequate disclosure MA

82 Massachusetts – Cases Sales Factor Sourcing - The Income Producing Activity Test: AT&T Corp. v. Commissioner of Revenue (July 2012, Court of Appeals) Qualifying as a Manufacturing Corporation: Random House, Inc. v. Commissioner of Revenue (October 2012, ATB) Add Back of Intangible Expense – “Embedded Royalties:” Kimberly-Clark Corporation and Kimberly-Clark Global Sales, Inc. v. Commissioner of Revenue (January 2011, ATB) Cash Management Systems: Sysco Corporation v. Commissioner of Revenue (October 2011, ATB) MA

83 Massachusetts – Administrative Update DOR to appoint 15 member Advisory Council Streamlined settlement program for cases in excess of $1 million –Can be initiated any time after audit issues are developed –Optional for both DOR and the taxpayer –Mediator can be DOR employee or an independent party selected by the taxpayer with DOR approval and paid for by the taxpayer DOR solicits input on construction contractor regulation project Directive 12-5 – Business subject to state tax as corporations must register on-line by April 1 in order to be treated as corporations for local property tax purposes MA

84 Budget Deficits Significant audit activity –Forced combination –De-combination Prior law –Ownership –Unitary business –Distortion Amended Law –De-emphasize transfer pricing New York State and City Combined Reporting Update NY

85 Ownership Substantial Intercorporate Transactions –Intercorporate receipts –Intercorporate expenditures –Intercorporate asset transfers Proposed Amendments to Regulations Largely Incorporate TSB-M-08(2)C –10-step process to determine companies to be included in a combined group Timing Difference Between State and City –Potential in interim period for different outcomes * Effective for tax years beginning on or after 1/1/2007 for New York State and on or after 1/1/2009 for New York City New York State and City Amended Combined Reporting Rules* NY

86 Unitary Business –Separate lines of business –Centralized management –Holding companies Distortion –How much is needed Intercompany Relationships –Business purpose –Economic substance Computational Issues –Sale of a subsidiary Bausch & Lomb TSB-M-08(3)C New York State and City Combined Reporting Controversies NY

87 Tax Impact –Current year –Future years –Prior years open under statute of limitations Which Companies are to be Included –Limited combinations Lines of business Divisional operations Unitary Relationships Intercorporate Transactions Documentation Retroactive Combination New York State and City Combined Reporting Evaluation NY

88 Hot Issue –Bright-line standard – 14 day rule TSB-M-12(5)I –Implications of Form IT-2104.1 –Potential penalty for noncompliance –Interrelationship with personal income tax audits Political issue relating to noncompliance for key executives Planning Strategies –Assess prior exposure –Procedural controls –Documentation New York State Withholding Tax Audit Initiative NY

89 Whistleblower Lawsuits are on the Rise New York State False Claims Acts Sprint Nextel Responsible Officer Liability Poses Risk for Key Executive Officers Steinberg MTA Payroll Mobility Tax Struck Down Mangano v. Silver NYC Suspends Position on UBT Audits Expenses were to be shifted away from investment management entities Other New York Developments NY

90 Gletfelter Puplwood Co. Nonbusiness Income Definition Changed in 2001 to Read “either the acquisition, management or disposition…” Legislature Declared that the Intent of the Amendment was “to clarify existing law.” Commonwealth Court Held that Gain was Business Income Under Any Test. Addressed Legislative Intent in a Footnote. Pending before Pennsylvania Supreme Court. PA, NJ

91 Sales and Use Tax Northeastern PA Imaging Center – MRI Machines Don’t Constitute Real Property. “Cloud Computing” is Subject to Sales Tax if the User of the Canned Computer Software is in Pennsylvania (L.R. SUT-12-001). Remote Seller Nexus (News Release Dec. 1, 2011 and Jan. 27, 2012) – Remote Sellers had until September 1, 2012 to Register and Begin Collecting Sales Tax. PA, NJ

92 Pennsylvania Policies Penalty Abatement at Audit Level Settlement Authority at Board of Appeals No Bond to Play Voluntary Disclosure Program is Back PA, NJ

93 New Jersey Transfer Pricing Audit contract with Chainbridge lapsed. Issued TAM-17 in 2011 Issued TAM-2012-1 Which Recognizes Similarity with Arm’s-Length Pricing Requirements of IRC § 482. PA, NJ

94 Intangible Nexus Lanco & Praxair – Intangible Holding Companies are Taxable and You Should Have Known It. Prior “Deal” in 2007 – Lookback to 1996, 5% Amnesty Penalty, 9% of N.J. Gross Receipts. New “Deal” – Lookback to 2004, 5% Penalty, 50% of Additional Tax Due for Throwout. PA, NJ

95 Beyond Trademarks? Prior Initiative Regarding Banks Having Economic Nexus in New Jersey. Tax Court Previously Decided Cases for Quark / Accuzip. Cases Pending Regarding Use of Patents Outside the State to Produce Products Sold in New Jersey. Cases Pending Regarding Use of Copyrights and Software in the State. PA, NJ

96 Division of Taxation Initiatives 140 New Auditors Expansion of Emphasis on Fraud Posting of Audit Manual On-Line Greater Discretion to Conferences & Appeals Greater Coordination with Attorney General’s Office PA, NJ

97 BIS Appellate Division Remanded to the Tax Court for Issue Not Raised Previously. Division Argued that Partnership (and not the Partner) Was Entitled to Refund but the Statute Had Run. Tax Court Found that the Partner was Entitled to a Refund of the Tax Paid by the Partnership. Tax Court relied on 2001 Legislative History for 2002 Statute PA, NJ

98 What’s Happening Friday November 30, 2012

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