| 1 | STATE AND LOCAL TAXES (SALT): CURRENT DEVELOPMENTS Bruce Nelson, M.A., CPA EKS&H (970)

| 2 | Federal Developments in SALT Marketplace Fairness Act (MFA) of 2015 Federal legislation that addresses sales tax collection on remote sales via the Internet Essentially the same as last year’s proposal

| 3 | Federal Developments in SALT What will the MFA do?  The bill will allow qualifying states to require remote sellers to collect sales and use tax on sales in that state. Qualifying State  A member of the Streamline Sales Tax Agreement, or a state must simplify by providing --  A single return filed with a single entity that handles all administration including audits.  Uniform tax base.  Free boundary database, with taxability matrix, and free “hold harmless” software Small Seller Exception  Sellers with gross annual receipts of $1 million or less in remote sales are exempt.

| 4 | Federal Developments in SALT Remote Transactions Parity Act Similar to the MFA Except –Small seller exemption is $10 million/$5 million/$1 million spread over three years –Catalog seller exemption

| 5 | Federal Developments in SALT Digital Goods and Services Tax Fairness Act of 2015 The bill would regulate state taxation of downloaded music, movies, and books Provide uniform sourcing rules Prevent “multiple and discriminatory” taxation of digital goods

| 6 | Federal Developments in SALT Permanent Internet Tax Freedom Act This bill would make the existing ban on state and local taxes on Internet access and discriminatory taxes permanent PITFA passed the House on June 9, 2015 and is sitting in the Senate Companion bill, the Internet Tax Freedom Forever Act, was reintroduced in the Senate on February 10, 2015 Current bill expires December 11, 2015

| 7 | National Developments in SALT - Nexus “Click-through Nexus” States that have adopted click-through nexus now include Arkansas, California, Connecticut, Georgia, Illinois (ruled unconstitutional but re-enacted), Kansas, Maine, Michigan (Oct. 2015), Minnesota, Missouri, New Jersey, New York, North Carolina, Pennsylvania, Rhode Island, Tennessee, Vermont, and Washington.

| 8 | National Developments in SALT - Nexus The Direct Marketing Association v. Brohl, 735 F.3d 904 (10 th Cir. Ct. App., Aug. 20, 2013)(rehearing denied), petition for certiorari filed United States Supreme Court (Feb. 25, 2014); Direct Marketing Association v. Brohl, U.S. Supreme Court, Dkt , (March 3, 2015) Direct Marketing Ass’n v. Colorado Department of Revenue, Case No. 13CV34855, Colo. Dist. Ct., Denver (Feb. 18, 2014)

| 9 | National Developments in SALT - Nexus Out-of-state taxpayers that exceed any of the following thresholds in the state during the tax period: –(1) $50,000 of property; or –(2) $50,000 of payroll; or –(3) $500,000 of sales; or –(4) 25% of total property, total payroll, or total sales. are deemed to be doing business in the state and have an income tax filing obligation.

| 10 | National Developments in SALT - Nexus States with factor presence nexus include Alabama, California, Colorado, Connecticut, Kansas, Michigan, New York, Ohio, and Washington. –Newegg, Inc. v. Testa, No (Ohio Bd. Tax App. February 26, 2015) –Crutchfield, Inc. v. Testa, Nos , , (Ohio Bd. Tax App. February 26, 2015) –Mason Companies, Inc. v. Testa, No , (Ohio Bd. Tax App. April 20, 2015)

| 11 | National Developments in SALT - Nexus “I am going to reach right through that line and... tax you.” –Texas Comptroller of Public Accounts, Nos H, ; CPA Hearing No. 106,632 (September 19, 2014)

| 12 | National Developments in SALT - Apportionment Gillette Co. and Subs. v. California Franchise Tax Board, 209 Cal. App. 4 th 938 (Oct. 2, 2012), aff’d on reh’g (Oct. 25, 2012). International Business Machines Corp. v. Department of Treasury, No MT, (Mich. Ct. Claims 2015) Gillette v. Department of Treasury, No , Mich. Ct. App. (Sept. 29, 2015)

| 13 | National Developments in SALT - Apportionment The following states provide for single sales factor apportionment: Arizona (effective 2016)Michigan California Minnesota ColoradoNebraska Georgia New York Illinois Oregon Iowa Pennsylvania Indiana South Carolina Maine Texas Utah Wisconsin

| 14 | National Developments in SALT - Apportionment ABC Corporation does business in two states and has collected the following data with respect to their sales, property, and payroll. The company’s federal taxable income after state modifications was $1,000,000. State X State Y Total Sales12,000,0004,000,000 16,000,000 Property 3,000,0002,000,000 5,000,000 Payroll 1,200, ,000 2,000,000 If both states use an equally balanced three-factor apportionment, ABC’s taxable income is apportioned in the following manner:

| 15 | National Developments in SALT - Apportionment State X Sales (12,000,000/16,000,000)75% Property (3,000,000/5,000,000)60% Payroll (1,200,000/2,000,000)60% Total of factors195% Divided by three (195/3) 65% Times taxable income × 1,000,000 State X taxable income $650,000 State Y Sales (4,000,000/16,000,000)25% Property (2,000,000/5,000,000)40% Payroll (800,000/2,000,000)40% Total of factors105% Divided by three (105/3) 35% Times taxable income × 1,000,000 State Y taxable income $350,000

| 16 | National Developments in SALT - Apportionment State X Sales (12,000,000/16,000,000)75% Property (3,000,000/5,000,000)00% Payroll (1,200,000/2,000,000)00% Total of factors 75% Times taxable income 1,000,000 State X taxable income $750,000 State Y Sales (4,000,000/16,000,000)25% Property (2,000,000/5,000,000)40% Payroll (800,000/2,000,000)40% Total of factors 105% Divided by three (105/3) 35% Times taxable income 1,000,000 State Y taxable income $350,000

| 17 | National Developments in SALT - Apportionment “Sales, other than sales of tangible personal property, are in this state if –The income-producing activity is performed in this state; or –The income-producing activity is performed both in and outside this state and a greater proportion of the income-producing activity is performed in this state than in any other state, based on costs of performance.”

| 18 | National Developments in SALT - Apportionment Market-based sourcing –The theory is to source the sale or gross receipts to the location of the customer, i.e., the market state –But what does that mean?

| 19 | National Developments in SALT - Apportionment How do you define the “market?” –Where the services are performed? –Where the services are received? –Where the benefit of the services are received? –Where the customer is located? Corporate headquarters Order location Billing office

| 20 | National Developments in SALT - Apportionment States that have adopted market-based sourcing include Alabama, California, Georgia, Illinois, Iowa, Maine, Maryland, Massachusetts, Michigan, Minnesota, Missouri, Nebraska, New York, Ohio, Oklahoma, Pennsylvania, Tennessee (effective July 1, 2016), Utah, Washington, and Wisconsin. The Triple Threat (California) –Factor presence standard –Single sales factor –Market based sourcing

| 21 | Questions?