Tax Executives Institute, Inc. Meeting November 13, 2015 www.pwc.com.

Tax Executives Institute, Inc. Meeting November 13, 2015 www.pwc.com

PwC Agenda Welcome Michigan CIT, MBT & Administrative Updates ( 10:00 - 11:00am) Treasury Q&A ( 11:00am - 12:00pm) Lunch ( 12:00 - 1: 00pm) Sales tax update – Michigan & Midwest developments ( 1:00 - 1:45pm) Abandoned & Unclaimed property update (1:45 - 2:20pm) Break (2:20 - 2:30pm) National review – Hot topics, Cases, Legislation, etc. ( 2:30-3: 30pm) Wrap up (3:30pm) Networking reception afte rwards (3:30 - 5:00pm)

PwC Michigan CIT, MBT & Administrative updates Eric Burkheiser, SALT Partner, PwC Tim Pratcshler, SALT Partner, PwC Mike Kammann, SALT Director, PwC 3 November 13, 2015

PwC Current state of tax administration New Treasurer, Nick Khouri, is making efforts to enact change -Input from business community & tax professionals -Taxpayer friendly changes -Taxpayer Advocate’s Office -Adjustment notices containing more detail -More written guidance, including RABs November 13, 2015 4

PwC Current state of tax administration However, old habits die hard -Legislating within Treasury -SOL interpretation – Public Act 3 of 2014, LR 2015–2 and draft RAB -Retroactive legislation in IBM – more to come? -Auditors ignoring refunds in audits – MCL 205.5, 205.6 & Taxpayer’s Bill of Rights -Processing delays - getting better though -Continued inconsistent application of penalties (Express Scripts) -Length of audits -Lack of guidance -Inconsistent treatment of technical positions (e.g., PFOF) -Unprocessed returns November 13, 2015 5

PwC Other departmental items Appeal extensions on POA issues POA Recognition Reform -New POA Form 151 (Rev. 10–15) released November 2nd CIT FAQs -Occasional sales -NOL attribution among members (effectively follows IRC Treas. Reg. 1502–21) Detroit City Income Taxes November 13, 2015 6

PwC Administrative pronouncements RAB 2015–20 – Corporate Income Tax, Where Benefit of Services is Received -Analysis/documentation required before skipping straight to billing address sourcing -Chosen method must be applied uniformly and consistently, and supported by the taxpayer’s business records -Benefit received MBT case pending in MI Court of Claims (Brightspark Travel) RAB 2014-5 – CIT Nexus Standards -To summarize, if you breathe in MI, you have nexus -Application to foreign companies November 13, 2015 7

PwC Michigan flow-through withholding Proposal by Department to repeal flow-through entity (FTE) withholding -Michigan’s FTE withholding form is overly complex -Tax preparers and FTEs dislike the expense and complexity of the forms Proposal includes change to require an annual information return -Department’s rationale ◦Ease of preparation and reliability of information ◦Creates a state Form K-1 ◦Reliable audit data ◦Exposure limited to a single annual penalty ◦The statutory authority already exists ◦Most states use an information return Concerns/Considerations -Additional taxpayer administrative burden -Apportionment on K-1 - Individual vs. corporate November 13, 2015 8

PwC LR 2015–2, PA 3 of 2014 – SOL changes Change in SOL statute raises questions on SOL suspension during periods under audit Prior Law – Generally, under MCL 205.27a(2), Michigan had a four year SOL for refunds or assessments. However, the running of the SOL was suspended from the date a Michigan audit commenced until one year after the finalization of the audit. The remainder of the four year statute began running at that time. Practically, this gave the MDOT little incentive to close audits and led to Michigan audits continuing for extended periods with little certainty for taxpayers as to when the SOL would close. Public Act No. 3 of 2014 – Effective February 6, 2014, Michigan amended the SOL statute and, as part of the amendment, removed the Michigan audit SOL suspension provisions contained in the prior law. This led to uncertainty as to how the SOL amendment applied to tax years for which audits commenced prior to the amendment of the statute. November 13, 2015 9

PwC LR 2015–2, PA 3 of 2014 – SOL changes Change in SOL statute raises questions on SOL suspension during periods under audit LR 2015-2 & Draft RAB – The MDOT has taken the position that the prior version of the law applies to audits commenced prior to February 6, 2014. That is, any audits in progress prior to signing of Public Act No. 3 of 2014 are not affected by the amendment to the statute and the SOL will remain suspended until the completion of the audit and for one year afterwards. The MDOT’s position would allow the Department to assess tax after the four year SOL when there was an open audit prior to February 6, 2014, despite the fact the suspension provisions no longer exist in Michigan law. (Note: this logic may also allow taxpayers to continue to file refund claims for those periods.) While the MDOT’s position may be beneficial to Taxpayer’s wishing to file refund claims, an alternative position exists that the amended statute, which was effective immediately, applies to all years and any assessments issued more than four years from the extended due date of the return are not valid assessments. This is currently being litigated at a trial level court in Michigan. November 13, 2015 10

PwC LR 2015–2, PA 3 of 2014 – SOL changes Based on the Department’s guidance - Three buckets of audits exist: -Audits commenced before 2/6/2014 -Audits commenced after 2/6/2014 and before 10/1/14 -Audits commenced after 10/1/14 Do the Michigan courts agree? Dicta in Court of Claims decision – W. Soule & Co. v. Department of Treasury, State of Michigan Court of Claims, No. 14-000163-MT (7/7/2015) Alma Piston Company v. Department of Treasury, State of Michigan Court of Appeals, Docket No. 209172 (6/25/1999) Refund vs. assessments: -Documentation of refund is key Retroactive legislation? November 13, 2015 11

PwC MBT common audit issues/Cases Examples of Hotly Debated Issues: -Bundled Transactions: BNP Media II LLC v. Department of Treasury, Mich. App. Ct., No. 314458, May 20, 2014 -Materials & Supplies: multiple trial and administrative level appeals currently pending. The Department is agreeing with a much more expansive definition than it has publicly indicated in at least on e case that we are aware of. -Credit Ordering -ITC Recapture – Finally resolved via technical correction in 2014 -Market Sourcing/Benefit Received (Brightspark Travel) November 13, 2015 12

PwC Michigan MTC update 13 November 13, 2015

PwC Michigan – IBM v Dep’t of treasury International Business Machines Corp. v. Department of Treasury, Mich. Supreme Court Docket No. 146440, July, 14, 2014 The Michigan Supreme Court held that IBM was entitled to use the Multistate Tax Compact’s elective three–factor apportionment formula to calculate its 2008 Michigan business tax. The court also held that the modified gross receipts component of the tax fit within the broad definition of an income tax under the Compact, thereby allowing IBM to use the Compact’s elective formula for this portion of the tax base. November 13, 2015 14

PwC MI MTC statutory action & fallout S.B. 156 (Act 282), signed on September 12, 2014 Repeals Public Act 343 of 1969, which enacts the Multistate Tax Compact. The bill is retroactive to January 1, 2008. Can they really do that? Is this retroactive repeal constitutional? Gillette Commercial Operations North America & Subsidiaries, Mich. Ct. App., No. 325258 (9/29/15).Gillette Commercial Operations North America & Subsidiaries November 13, 2015 15

PwC Treasury Q&A Diane Molesky, Director, Masco Corporation Chair of TEI Michigan Chapter 16 November 13, 2015

PwC Lunch break 17 November 13, 2015

PwC Michigan audit issues Brad Danton, SALT Partner, PwC 18 November 13, 2015

PwC Considerations for Michigan audits Michigan Adjustments to Appeal Options Public Act 79 of 2015 amended Section 22 of the Revenue Act by making two procedural changes to appealing assessments. Repeals the requirement that the taxpayer pay any amounts it disputes within 90 days of assessment as a prerequisite to appeal to the Court of Claims (commonly referred to as “pay-to-play”). Prior to the effective date in order to invoke the jurisdiction of the Court of Claims, taxpayers are required to pay the entire assessment. Also increased the time in which a taxpayer may appeal an assessment to the Michigan Tax Tribunal from 35 to 60 days. Public Act 79 of 2015 is effective 90 days after the Legislature adjourns from its 2015 session. The Legislature is tentatively scheduled to adjourn on December 17, 2015; if that is the date of adjournment, the Act will be effective on March 17, 2016. 19 November 13, 2015

PwC Considerations for Michigan audits Rules for Auditor Conduct On May 13, 2015, Treasury promulgated new administrative rules regarding the professional conduct of its auditors. New administrative rules generally follow the Code of Professional Conduct of the American Institute of Certified Public Accountants (AICPA). The rules address technical training and educational requirements, confidentiality, independence, objectivity, due professional care, reasonable assurance, planning and supervision, understanding internal controls and assessment of risk, evidence, sampling, and elements of an audit report. The rules are stated as broad principles that require auditors to resolve matters in an ethical manner. The new field audit rules can be found in their entirety on the website of the Department of Licensing and Regulatory Affairs (www.michigan.gov/lara).(www.michigan.gov/lara). 20 November 13, 2015

PwC Considerations for Michigan audits Internal Procedures for Audit Fairness and Efficiency Treasury’s Tax Compliance Bureau implemented new internal procedures to enhance audit fairness and efficiency. Including: Standardizing opening conference requirements to better communicate scope and mutual expectations of the parties regarding audit process; Implementation of an audit management tool to establish mutually agreed upon milestones for shorter audits and better communication; Publication of audit manuals; and Establishment of a dedicated training and quality assurance unit to improve consistency and predictability of audits. Current audit manuals can be found on Treasury’s website at http://www.michigan.gov/taxes/0,4676,7-238-43519_43524---,00.html. http://www.michigan.gov/taxes/0,4676,7-238-43519_43524--- 21 November 13, 2015

PwC Considerations for Michigan audits Michigan Treasury Offers-in-Compromise (OIC) Program As of January 2015, a taxpayer may submit an offer to compromise tax debt based on one or more of the following grounds: (1) the taxpayer has received an accepted federal offer-in-compromise from the Internal Revenue Service; (2) the taxpayer can demonstrate that there is a doubt as to the collectability of the tax debt; and (3) the taxpayer can demonstrate that there is a doubt as to the taxpayer’s liability for the tax debt even though the appeal rights have lapsed. An offer-in-compromise based on receipt of an accepted federal offer-in- compromise may only be submitted for tax debt attributed to individual income tax or corporate income tax under part 1 or part 2 of the Michigan Income Tax Act, MCL 206.1 to 206.699, for the same tax years as the federal offer-in- compromise accepted by the IRS. 22 November 13, 2015

PwC Considerations for Michigan audits Michigan Treasury Offers-in-Compromise (OIC) Program A taxpayer submitting an offer-in-compromise based on doubt as to collectability must show: (1) that the amount offered is the most that can be expected to be paid or collected from the taxpayer’s present assets and sources of income; and (2) that the taxpayer does not have reasonable prospects for acquiring more income or assets within a reasonable period of time that would enable the taxpayer to pay a greater amount of the tax debt than the amount offered. A taxpayer submitting an offer based on doubt as to liability must demonstrate that the taxpayer would have prevailed in a contested case if the taxpayer had in fact appealed the assessment. 23 November 13, 2015

PwC Cloud Computing 2724 November 13, 2015

PwC Cloud Computing – Evolving the IT Stack Traditional IT Stack Corporate IT hosted on-premise Each component linked, and built to satisfy future capacity Riddled with complexity, high management costs, lack of efficiency, unused capacity Cloud IT Can be hosted on-premise, off premise or hybrid Components are no longer linked, and can be provisioned as a service in whatever combination needed Built for most effective utilization Degree of complexity, management costs decrease, much more efficient use of resources 25 Cloud LayersTraditiontal IT Stack 0 0 Data Center Facilities Networking Servers and Storage Operating Systems Applications Application Development & Deployment Infrastructure Software (VM, Database, IT Mgmt) Software as a Service (SaaS) Platform as a Service (PaaS) Infrastructure as a Service (IaaS) November 13, 2015

PwC State and local indirect tax considerations for cloud computing Michigan Treasury Update – Vol. I, Issue 1, November 2015 Tax Policy published its position regarding software and cloud computing. In general, “prewritten computer software” is distinguished from “custom software.” Custom software is software that is designed for the exclusive use and special needs of a single purchaser and is exempt from both sales tax and use tax. However, if a transaction involves a fee (license or subscription) for the use of prewritten computer software, the transaction would be considered a taxable use of prewritten computer software. Furthermore, it is Treasury’s position that under Michigan law it is not relevant how prewritten computer software is delivered, specifically, whether it is accessed remotely or downloaded. 26 November 13, 2015

PwC State and local indirect tax considerations for cloud computing Treasury Update – Vol. I, Issue 1, November 2015 The taxability of certain forms of “cloud computing” is currently being litigated. To date, there have not been any precedential decisions on this issue. The Michigan Tax Tribunal adopted Treasury’s position in Great Lakes Home Health Services, Inc., v Department of Treasury, Michigan Tax Tribunal, 410962, (10/23/2012). Treasury also prevailed in Thomson Reuters Inc., v Department of Treasury at the trial court level, but lost in the Michigan Court of Appeals. 313825, 05/13/2014 (Unpublished). Treasury is currently appealing Thomson Reuters, along with several other cases, including Auto-Owners Insurance Company v Department Of Treasury, 12-000082-MT, 03/20/2014. In September, oral arguments took place in the Auto-Owners case at the Court of Appeals, and a decision is expected this year. Stay tuned for future updates! 27 November 13, 2015

PwC Cloud computing Cloud computing services not taxable in Michigan The Michigan Court of Appeals, in a published decision, determined that software contracts between an insurance provider and third party companies were not subject to taxation under Michigan’s Use Tax as they did not constitute delivery of prewritten computer software. The court noted the taxpayer never exercised an ownership-type right or power over the third party software, therefore did not use tangible personal property within the meaning of the Use Tax Act. The Appeals Court also held in those transactions where the taxpayer did exercise a right or power over tangible personal property, the transfer of tangible personal property was incidental to the rendering of professional services, and so those transactions were not subject to use tax. Auto-Owners Insurance Company v. Department of Treasury, Michigan Court of Appeals, No. 12-000082-MT (10/27/2015 28 November 13, 2015

PwC Cloud computing Vermont agrees with Michigan and asserts taxation of remotely accessed software consistent with SSUTA The Vermont Department of Taxes issued a statement disagreeing with the Business Advisory Council's (BAC's) conclusions regarding the treatment of remotely accessed prewritten software. The term “delivered electronically” is defined in the SSUTA as “delivered to the purchaser by means other than tangible storage media.” The term 'delivered' is not further defined in the SSUTA. Vermont asserts that there is no indication that this section or any other section of the SSUTA was intended to limit the definition of ‘delivered electronically' to downloading while excluding remote access. Therefore, Vermont believes that its treatment of remotely accessed software is consistent with the SSUTA, as it is a tax on tangible personal property delivered electronically. Vermont Cover Letter to 2014 Compliance Review Response, Vt. Dept. of Taxes (10/21/2014); Vermont Spreadsheet Response to 2014 Compliance Review, Vt. Dept. of Taxes (10/21/2014) 29 November 13, 2015

PwC Cloud computing Emulating Michigan’s desire to create constructive use of software. Chicago tax applies to nonpossessory computer leases On June 9, 2015, the Chicago Department of Finance adopted Personal Property Lease Transaction Tax Ruling #12 to provide guidance on the taxability of cloud computing, software, and related products. The ruling clarifies that the Chicago personal property lease transaction tax applies to the use of personal property, including a nonpossessory computer leases, unless the charges are exempt. The Department noted that if a customer pays a provider for the ability to use the provider's computer to ‘input, modify or retrieve data or information’ then the charge is for the customer's use of the computer, and is taxable. Originally, the effective date of the ruling was July 1, 2015. However, on August 7, 2015, the Chicago Department of Chicago Department of Finance announced it would delay the effective date until January 1, 2016, in response to concerns from the city’s technology sector. Chicago Dept. of Revenue Personal Property Lease Transaction Tax Ruling No. 12 (6/9/2015). 30 November 13, 2015

PwC Cloud computing Again similar to Michigan constructive use is suggested as subscriptions for on-line research considered leasing of tangible personal property in Arizona The Arizona Department of Revenue held that subscription agreements allowing customers to use and access proprietary research and data content online are considered leases of tangible personal property for transaction privilege tax purposes. Customers access the research and data content services electronically through a website. Each subscriber has a unique name and password allowing ‘exclusive’ use of the website and subscribed-to research and data content. The taxpayer owns its proprietary content, the access to and use of which is being contracted-for by customers for a periodic subscription consideration. The Administrative Law Judge concluded that such activity is the leasing of tangible personal property for a consideration and the subscription amounts are taxable receipts from personal property rental activity. Decision No. 14C-201400197S-REV, Arizona Department of Revenue (3/11/2015) 31 November 13, 2015

PwC Cloud computing If we are going to tax cloud activities should the acquired infrastructure be non-taxable. Texas expands resale exemption to include computer programs sold to Internet hosting provider Effective June 10, 2015, Texas expanded the resale exemption to include computer programs sold to an Internet hosting provider. The legislation provides that a sale for resale includes the sale of a computer program to a provider of Internet hosting who acquires the computer program from an unrelated vendor for the purpose of selling the right to use the computer program to an unrelated user of the provider's Internet hosting services in the form or condition in which the provider acquired the computer program. However, for the exemption to apply, the software must be used in the normal course of business and the provider may not retain the right to use the computer program under that license. SB 755, signed by Governor 6/10/2015 32 November 13, 2015

PwC SaaS Nontaxable No specific formal guidance Taxable WA ID AZ NM LA AL ME HI CT DE MA AK AR CO MD CA KS FL GA IA IL MI MN MO MT NC SC VA WV WY OK NY PA OR ND NV NH OH RI VT NJ TX UT SD NE MS TN KY IN WI DC November 13, 2015 33

PwC Manufacturing/Processing Exemption 3634 November 13, 2015

PwC Manufacturing/Processing Exemption Michigan Supreme Court rules equipment used to process and distribute electricity qualifies for partial industrial processing exemption On July 22, 2015, in a 4-3 decision, the Michigan Supreme Court determined that machinery and equipment, located outside electricity generation plants and used to process and distribute electricity, were used simultaneously for exempt industrial processing and nonexempt distribution and shipping activities. The Court held the taxpayer is entitled to the industrial-processing exemption based on the "percentage of exempt use to total use determined by a reasonable formula or method approved by the department [of Treasury]." The Court remanded the decision to the Court of Claims for further proceedings to determine and approve such “reasonable formula or method.” Detroit Edison Company v. Department of Treasury, Mich. Sup. Ct. No. 148753 (7/22/15) November 13, 2015 35

PwC Manufacturing/Processing Exemption Telecommunications signals not tangible personal property for purposes of processing exemption in Michigan Purchases of electricity used to create telecommunications signals are not eligible for the industrial processing exemption. A taxpayer is engaged in industrial processing when it: (1) modifies tangible personal property for sale to consumers; or (2) uses tangible personal property to produce wholly new tangible personal property for sale to consumers. Therefore, to be eligible for industrial processing exemption, whatever the taxpayer eventually sells to consumers must be tangible personal property. The taxpayers assert that the purchase of electricity (which is tangible personal property) is used to create telecommunications signals, which are a new form of tangible personal property in their own right. However, the Michigan Court of Appeals concluded that telecommunications signals are not tangible personal property. MidAmerican Energy Company v. Department of Treasury, Michigan Court of Appeals, No. 316902 (12/4/2014) November 13, 2015 36

PwC Manufacturing/Processing Exemption Similar to Michigan Returnable containers an Issue in Indiana: Kegs considered taxable returnable containers in Indiana The Indiana Department of Revenue determined beer kegs are returnable containers and are reused to store, transport and serve beer, and are therefore not exempt from use tax. The taxpayer claimed that the kegs are not only used in the shipping and delivery of beer, but are also used in the production of beer and should not be taxable. Indiana law provides that nonreturnable containers are exempt from sales and use tax. The Department concluded that since the taxpayer charged a deposit for the kegs, it was expected that at least some, if not potentially all, of the containers would be returned for future use by the taxpayer. Therefore, the burden of proof was not met, and the containers are taxable. Letter of Findings No. 04-20140089, Indiana Department of Revenue (7/29/2015) November 13, 2015 37

PwC Manufacturing/Processing Exemption Can we manufacture taxable services? Hardware and software sold to a Missouri information services company not subject to use tax On April 21, 2015, the Missouri Administrative Hearing Commission (AHC) held that computer hardware and electronically delivered software sold to a Missouri data processing and information services company are not subject to use tax. IBM sold computer equipment and software to MasterCard to be used for services including “Authorization, Clearing, and Settlement (ACS), Stand-In, InControl, Fraud scoring, and [data] warehouse services.” Pursuant to Missouri statutes, the sale or lease of equipment used in manufacturing a product is exempt from use tax. The AHC accepted IBM’s uncontested position that the definition of ‘equipment’ included computer hardware such as servers, processors, memory, cables, power supplies, and data cartridges. Additionally, the AHC determined the applicable definition of ‘manufacturing’ includes the “[organization of] information through computer technology.” Therefore, IBM was entitled to a use tax refund on the sale of the computer hardware to Mastercard. In addition, since the software was not delivered in a tangible medium, IBM was also entitled to a use tax refund on the sale of electronically delivered software to Mastercard. IBM Corp. v. Dir. Of Revenue, No. 12-0030 RS, Mo. Admin. Hearing Commission (4/21/2015). November 13, 2015 38

PwC Sales and Use Tax Nexus 39 November 13, 2015

PwC Attributional Nexus – Michigan Michigan enacts click-through and affiliate nexus legislation On January 15, 2015, Michigan Governor Rick Snyder signed legislation adopting click-through and affiliate controlled-group sales and use tax nexus provisions. The laws, which go into effect October 1, 2015, presume an out-of- state seller has nexus in Michigan when certain conditions are met. A retailer may rebut this presumption by demonstrating that no in-state solicitation or other activities associated with establishing or maintaining a market in the state are taking place. Senate Bills 658 and 659, signed by Governor 1/15/2015; Notice of New Sales Tax Requirements for Out-of-State Sellers, Michigan Department of Treasury (2/23/2015) Treasury indicated in its November 2015 Treasury Update that it plans to issue on RAB in the near future that further explains the presumptions of nexus created and documentation that can be utilized to rebut the presumptions. November 13, 2015 40

PwC Attributional Nexus – Ohio Ohio enacts click-through nexus legislation Effective July 1, 2015, a seller is presumed to have substantial nexus with Ohio if the seller enters into an agreement with one or more residents under which the resident, for a commission or other consideration, directly or indirectly, refers potential customers, by a link on a website, in-person oral presentation, or otherwise, to the seller. The presumption requires that the cumulative gross receipts from sales by the seller to customers in Ohio who are referred to the seller be greater than $10,000 during the immediately preceding 12 months. The presumption may be rebutted by demonstrating that the persons with whom the seller had agreements did not engage in activities that were significantly associated with the seller’s ability to establish or maintain a market in Ohio. HB 64, Laws 2015, signed by Governor 6/30/2015 November 13, 2015 41

PwC Varying State Approaches MethodsProposedEnactedNotes Click Thru2010: MD, VA 2011: AZ, HI, LA, MA, MI, MN, MO, MS, NM, PA, TN, TX 2012: FL, GA, HI, IN, IA, KS, MN, MD, MO, MS, VT 2013: FL, HI, IN, MA, MI, MS, MO, OH, PA 2014: CO, HI, IN, SC, TN 2015: MD, SC 2008: NY 2009: NC, RI 2011: AR, CA, CT, IL*, VT, PA ruling 2012: GA 2013: KS, ME, MN, MO 2014: NJ, IL* 2015: MI, NV, OH, TN, WA VT effective once 15 states have adopted similar provisions. The Attorney General makes the determination of when that trigger has been met, and has not issued an opinion on the matter. Governor suggested in January 2015 that this provision should be changed to one year after 25 states have adopted similar legislation. CT moved up effective date to 5/4/2011 *Previously invalidated. Illinois has amended its click- through nexus statute approved by Governor 8/26/2014 ‘Affiliate’ Controlled Group/Substantial Ownership/Distributi on/ Warehouse 2011: LA, ME, MI, MO, PA, SC 2012: AZ, FL, IN, IA, KS, HI, LA, MD, MI, MO, NJ, TN, VT, WA 2013: CO, FL, HI, IN, MA, MI, MS, NM, OK, PA 2014: CO, HI, IN, TN 2015: LA, WA 2010: CO, OK 2011: AR, CA, DC*, IL, NY, SD, TX 2012: GA, UT, VA 2013: IA, KS, ME, MO, WV 2014: CO 2015: MI, NV Often requires the members to be selling similar product line. *DC requires all out of state vendors to file, but not effective until department enacts regulations. *OK Includes all Internet sales to purchasers in Oklahoma even if seller does not have substantial nexus, unless exempted by other states Use Tax Reporting Requirements 2011: AL, ME, PA 2012: FL 2013: PA, WI 2014: PA 2010: CO, OK 2011: SC*, SD, TN*, VT 2013: KY VT can be repealed once click thru is effective *Applies only in select situations. November 13, 2015 42

PwC Varying State Approaches MethodsProposedEnactedNotes Use Tax Remittance2015: AL Non-nexus sellers can register, collect and remit use tax on sales to Alabama customers at a flat 8% rate. The non-nexus sellers can keep 2% of taxes collected. However, non-nexus sellers must be registered and remitting taxes at least six months prior to adoption of federal legislation requiring remote or non-nexus sellers to collect and remit Alabama’s sales or use taxes to continue in the program. AgreementsIndependent State agreements with Amazon to begin collecting tax CA click thru effective 9/15/2012 AZ begin collecting 2/1/2013 and 7/1/2013 NJ begin collecting 7/1/2013 GA begin collecting 9/1/2013 WV begin collecting 10/1/2013 TN, NV & VA begin collecting 1/1/2014 CT, MA begin collecting 11/1/2013 NC begin collecting 2/1/2014 FL begin collecting 5/8/2014 MD & MN begin collecting 10/1/14 IL begin collecting 2/1/15 SC begin collecting 1/1/16 Cases/Assessments NY, click thru challenge IL, click thru challenge CO, injunction against retailer notification NC, Amazon privacy decision AZ, $53 million assessment Marketplace Collection Responsibilities 2015: NY Marketplace sales and use tax collection provision was NOT included in final version of the enacted NY 2015 budget legislation November 13, 2015 43

PwC Click-through nexus States that have enacted click-through legislation Pennsylvania ruling says current law is broad enough to include click-through nexus November 13, 2015 44

PwC Affiliate nexus States that have enacted affiliate nexus legislation * Note this map only tracks formally enacted state legislation (since 2009) and does not address states where pre-existing ‘affiliate nexus’ language may already exist (e.g., NJ). November 13, 2015 45

PwC Notice and reporting requirements States that have enacted notice and reporting legislation November 13, 2015 46

PwC Abandoned & unclaimed property update Patty Jo (PJ) Sheets, Director AUP, PwC November 13, 2015 47

PwC Contents Legislative developments Current audit landscape Unclaimed property – Background, types and reporting fundamentals Unclaimed property reporting Policies and procedures Judicial updates November 13, 2015 48

PwC Legislative developments Delaware SB 141 -Limitation on new unclaimed property examinations -Limitation of the look back period for pending and new examinations (1986) -Amendments to the voluntary disclosure agreement policy -Amendments on interest imposed on unpaid unclaimed property amounts -Amendments to the unclaimed property reporting requirements. Michigan SB 538 -Passed by Senate on 10/28 -Streamlined Audit Process -Reduced Lookback -Exemption for property less than $50 November 13, 2015 49

PwC Legislative developments Ohio: -Sogg v. Goodman, Case No. 04-CVG-8028 ◦Lawsuit ruled that the Ohio Department of Commerce Division of Unclaimed Funds (“Division”) is required to pay interest on unclaimed funds returned to its owners effective October 9, 2012. ◦Persons who received unclaimed property on or after August 3, 2000 through October 9, 2012, who are entitled to interest under the settlement, will be mailed a check for their interest. ◦Those receiving unclaimed property from the Division on or after October 10, 2012, will have their interest added to their claim payment by the Division at the time the claim is paid. November 13, 2015 50

PwC Current audit landscape States are becoming increasingly aggressive as they look for ways to increase revenues without raising taxes Some states have created internal unclaimed property audit departments while others utilize third-parties that audit on a contingent-fee basis (i.e. Kelmar Associates LLC, Specialty Audit Services, Verus Financial LLC, etc.) Audits typically cover the following property types: -Accounts receivable, including overpayments, deposits, credits, etc -Benefits -Third party administered payments -Rebates -Equity November 13, 2015 51

PwC Unclaimed property – Background, types and reporting fundamentals 52 November 13, 2015

PwC What is unclaimed property Property that has not been claimed by an “owner” for a specified period of time (dormancy period) is considered abandoned or unclaimed. Must be a fixed and certain legal obligation of the holder to the owner. After statutorily defined holding periods, the “holder” of the property has an obligation to file annual reports and remit the property to the appropriate state(s). Unclaimed property is not a tax to the holders but can be a source of revenue to the state. In excess of 100 types of property are considered potential sources of unclaimed property. States have recognized this as a good source of non-tax revenue. November 13, 2015 53

PwC Unclaimed property overview – Common terms Dormancy Period – Period of time property remains inactive before it is presumed abandoned. Holder – Person or business in possession of property. Owner – Individual or business entitled to the property. Due Diligence – Holder must contact owner prior to remitting property to state. Holder Domicile – Physical location of the holder’s business. Activity – Clear action by owner that interest in property exists. Custodian – Most states act as custodian for true owner. Date of Last Activity – Date or owner’s last activity. November 13, 2015 54

PwC Purpose of unclaimed property laws To reunite lost owners with their property. To protect the holder from subsequent claims by owners. To ensure that any economic windfall benefits the state and its citizens. November 13, 2015 55

PwC Common reportable property Money, checks, drafts, deposits, interest or dividends Credit balances, overpayments, gift certificates, security deposits, refunds, credit memos, unused tickets, wages, mineral proceeds Stock or other evidence of ownership of an interest in a business Bonds, debentures, notes Proceeds from annuity or insurance policies (e.g. life, property, casualty, worker’s compensation, health or disability) Distributions from trusts or other custodial funds (e.g. health, welfare, pension, vacation, severance, death, stock purchase, retirement, etc) Money deposited to redeem stocks, bonds or other securities or to make distributions November 13, 2015 56

PwC Jurisdictional priority Texas v. New Jersey (1965) First Priority: State of the owner’s last known address as shown in the holder’s books and records may escheat the unclaimed property, and its claim is superior to all competing claims. Second Priority: If no last known address for the owner is indicated in the holder’s books and records, or if the state of the owner’s last known address does not have applicable unclaimed property legislation, then the holder’s state of incorporation may escheat the unclaimed property. November 13, 2015 57

PwC Transaction rule of priority Several states and the NCCUSL (Uniform Law Commission) have included a third “Transactional” priority rule. Gives priority to state where transaction occurred if the first and second priority rules do not apply. Serious constitutional due process concerns. November 13, 2015 58

PwC Unclaimed property reporting 59 November 13, 2015

PwC Abandoned and unclaimed property reporting – What is required All 50 states require the annual filing of unclaimed property reports. The filing dates for unclaimed property reports vary by state. Dormancy periods vary by state and by property type. When filing an initial report, companies must determine the period of time subject to reporting, according to each state law, which varies. Some states accept filing by diskette, magnetic tape, Internet and CD-ROM, while others require electronic filing. Due diligence, which in certain circumstances requires the mailing of a first class letter to payees, is required by most states. Record Retention November 13, 2015 60

PwC Elements of compliance to consider First Time Filer/Past due liability -May need preliminary consulting -Voluntary disclosure assistance Volume of due diligence letters to be mailed Number of state reports filed (Spring and Fall) Number of items to be reported Number of business units or subsidiaries involved Exemptions Types of Reports (Negative/Preliminary/Final) Time requirements Staffing - who will own this responsibility? Expertise in Unclaimed Property Corporate Cultures November 13, 2015 61

PwC Identifying unclaimed property potential sources Journal Entries -Review journal entries for an understanding of accounts used to transfer unclaimed property. -Evaluate to see if company has reversed irreconcilable items to income/expense accounts and/or returned amounts to original accounts. Accounts Payable -Review regularly to alleviate volume of outstanding checks. All supporting documentation that demonstrate that a check has been resolved should be maintained indefinitely. -Outstanding checks can be housed in a liability account, written-off or remain on the outstanding checklist. November 13, 2015 62

PwC Identifying unclaimed property potential sources Payroll -Review regularly and keep supporting documentation indefinitely. -May be outsourced to a third-party. -Some states have an exemption to exclude reporting payroll if $50 or less (e.g. Kentucky, Michigan, Ohio). Voided Checks -Some companies void checks once stale dated. -Review regularly and keep supporting documentation indefinitely. Accounts Receivable -Audits focus on customer credits and accounts receivable credits. -Credits result from overpayments, volume discounts, returns and other customer transactions. -Credits and debits for same customer may be netted under certain circumstances. November 13, 2015 63

PwC Policies and procedures – Overview Establishment of guidelines and procedures related to the proper accounting, disposition and reporting of unclaimed property, and training of key personnel on the proper handling of unclaimed property and the statutory requirements for reporting can reduce Omnicare Inc.’s abandoned property audit risk. -Data Management ◦Gathering transactional data ◦Multiple systems ◦Use of abandoned property liability account ◦Record retention period -Due Diligence ◦Most jurisdictions require that an attempt be made to locate the owner of the potentially escheatable property prior to escheatment -Reporting ◦Evaluate if the reporting function should be performed in house or outsourced November 13, 2015 64

PwC Judicial updates Temple Inland v. Delaware Plains All American v. Delaware Jean Louis Imbach and Gilles Gosselin v. Delaware Delaware v. Cardfact November 13, 2015 65

PwC Break 66 November 13, 2015

PwC National Review – Hot topics, Cases, Legislation, etc. Eric Burkheiser, SALT Partner, PwC Tim Pratcshler, SALT Partner, PwC Mike Kammann, SALT Director, PwC November 13, 2015 67

PwC Tax haven legislation 68 November 13, 2015

PwC Tax havens Some states now provide for a mandatory inclusion in a combined report of corporations that are incorporated in “tax haven” countries as members of the water’s-edge combined group. Under the Multistate Tax Commission’s (“MTC”) model statute for combined reporting, water’s-edge reporting is permitted by election and includes the entire income and apportionment factors of any member doing business in a tax haven. What is a tax haven? -No universally accepted definition of the term “tax haven” (e.g., Organisation for Economic Co-operation and Development (“OECD”), MTC, individual states). -Where the entity is incorporated? Where the entity operates? November 13, 2015 69

PwC Tax havens Definitions 1.Blacklist – (DC, MT, OR) – Required inclusion in combined report 2.Criterion – creates uncertainty Unitary water’s edge combined reporting Enacted Tax Havens -States – AK, CT, DC, MT, OR, RI, WV MTC Model Reg Tax base -Uncertainty -Oregon (net income or loss reported on line 18, Sch C of Form 5471) Tax accounting implications November 13, 2015 70

PwC Tax haven legislative map November 13, 2015 71

PwC Nevada’s new commerce tax 72 November 13, 2015

PwC Nevada’s new commerce tax Commerce Tax is imposed on “Nevada-sitused” “gross revenues” in excess of $4 million -There are a number of deductions and exclusions from gross revenues, but no deductions for COGS or expenses -Deduction examples: dividends and distributions; pass-through revenue (as defined); bad debts; returns or refunds to customers -Exclusion examples: revenue from the sale of the right to use trademarks, trade names, patents, or copyrights; Value of Cash discounts; amounts realized from certain IRC tax-free transactions Taxpayers are required to file Commerce Tax return seven if they do not exceed the $4 million revenue threshold November 13, 2015 73

PwC Nevada’s new commerce tax Additional Commerce Tax details -Tax rate is dependent on Taxpayer’s primary industry -26 categories; based on NAICS codes; default “catch-all” rate – 0.128% -The fiscal year for every taxpayer is July 1 through June 30th - data gathering issues -Return due on or before the 45th day after June 30th -Commerce Tax deduction against MBT a deduction of 50% of the Commerce Tax paid is allowed against the Modified Business Tax liability November 13, 2015 74

PwC Market-based sourcing updates 75 November 13, 2015

PwC Market – Based sourcing *Effective in 2011, for taxpayers that elect single sales factor only, but see Prop. 39 **Elective for deemed multistate service providers ***in 2015 #service receipts only effective in 2014 ## intangible property receipts only November 13, 2015 76

PwC Market – Based sourcing Market sourcing variations by state: Benefit receivedServices receivedServices deliveredCustomer located Arizona California Iowa Michigan Rhode Island Utah Wisconsin Illinois Maine Minnesota Alabama Washington DC Massachusetts Pennsylvania Tennessee Colorado Georgia Maryland Nebraska Oklahoma November 13, 2015 77

PwC Market – Based sourcing New for 2015: Rhode Island: Service receipts are sourced to a state 'to the extent the recipient receives benefit of the service' Washington, DC: Effective January 1, 2015, currently awaiting Congressional approval Nevada’s New Commerce Tax: Effective July 1, 2015 -Revenue from the sale of other services in the proportion of the purchaser’s benefit in Nevada. The physical location where the purchaser ultimately uses or receives the benefit of the service is paramount in determining the proportion of the benefit in Nevada. If the taxpayer cannot determine that location, the taxpayer may use an alternative method to situs gross revenue, with certain conditions. -Revenue not otherwise described if the gross receipts are from business conducted in Nevada. The physical location of the purchaser is paramount in determining if business is conducted in Nevada. If the taxpayer cannot determine that location, the gross revenue must not be considered to be from business conducted in Nevada. November 13, 2015 78

PwC Market – Based sourcing What issues should be considered? Understand the specific state rules – there is no singular approach Understand the facts -What is generating the intangible or service receipts? -What parties are involved? -What information can be developed to support the receipts being reported? - Who are the customers? Individuals or businesses? November 13, 2015 79

PwC Market based sourcing – Understanding the state rules November 13, 2015 80

PwC New York state tax reform – Formula Pre-Reform (pre-2015)Beginning 2015 Article 9-A GeneralReceipts (since 2007)Receipts Article 32 BankingReceipts (x2) Deposits (x2) Payroll Eliminated; subject to Article 9-A MTA Surcharge – 9-A GeneralReceipts Property Payroll Receipts Property Payroll MTA Surcharge – 32 BankingGross IncomeEliminated; subject to 9-A New York City has not conformed GCT: SSF phase-in by 2018 (manuf. double weighted receipts prior to 2011) Bank: Receipts (x2) Deposits (x2) Payroll Tax Year BeginningPayrollPropertyReceipts 1/1/200930.0% 40.0% 1/1/201027.0% 46.0% 1/1/201123.5% 53.0% 1/1/201220.0% 60.0% 1/1/201316.5% 67.0% 1/1/201413.5% 73.0% 1/1/201510.0% 80.0% 1/1/20166.5% 87.0% 1/1/20173.5% 93.0% 1/1/20180.0% 100.0% November 13, 2015 81

PwC New York state tax reform – Sourcing framework Type of receiptsArticle 9-A Pre-2015Beginning 2015 Sale of TPPShipped to Rentals of real and TPPLocation of property Royalties from patents or copyrightsUse Sale of real propertyLocation of property ServicesPerformedLocation of customer 1.Benefit is received 2.Delivery destination 3.Prior year 4.Percentage for receipts that can be sourced under #1 or #2 Other business receiptsEarned November 13, 2015 82

PwC California Market-based sourcing was elective in 2011 and 2012 -Market sourcing applied for those electing SSF. -Cost of Performance for non-electors. Mandatory for years beginning on or after January 1, 2013 Mandatory SSF for tax years beginning on or after January 1, 2013, however there are some exclusions. Market-based sourcing effective on or after January 1, 2013, sales, other than sales of tangible personal property, are in this state if (CRTC § 25136): -Sales from services are in this state to the extent the purchaser of the service received the benefit of the service in this state. -Sales from intangible property are in this state to the extent the property is used in this state. In the case of marketable securities, sales are in this state if the customer is in this state. -Sales from the sale, lease, rental, or licensing of real property are in this state if the real property is located in this state. -Sales from the rental, lease, or licensing of tangible personal property are in this state if the property is located in this state. November 13, 2015 83

PwC Pennsylvania – Sourcing of services Introduction Effective for tax years beginning after December 31, 2013. 72 P.S. § 7401(3)2.(a)(16.1)(C) amended to provide that service income shall be sourced to Pennsylvania utilizing a market based sourcing approach. On December 12, 2014, the Pennsylvania Department of Revenue ( “DOR”) issued Information Notice Corporation Taxes 2014- 1 which provides guidance related to the Department’s interpretation of sourcing sales of services to Pennsylvania. The Notice reflects several revisions contemplated by the DOR since the issuance of its discussion draft in June 2014 Sales of intangible property continues to be sourced to Pennsylvania pursuant to the income-producing activity sourcing subject to the DOR’s new interpretation in the Notice. November 13, 2015 84

PwC Pennsylvania – Sourcing of services Sourcing of services rules Rule #1: Delivery Location/Percentage of Total Value. Rule #2: If Rule #1 cannot be used for an individual customer then us Billing Address. Rule #3: If Rule #1 cannot be used for a customer, other than an individual, then Order Location. If this cannot be used, then Billing Address. November 13, 2015 85

PwC Pennsylvania – Sourcing of services Rule #1: Percentage of Total Value Receipts from the sale of a service are considered to be in Pennsylvania if the service is delivered to a location in Pennsylvania. If the service is delivered both to a location in and outside of Pennsylvania, the sale is sourced to Pennsylvania based upon the percentage of the total value of the service delivered to a location in Pennsylvania. Delivery of the service from the customer’s perspective occurs at the ultimate location where the customer can use the service. November 13, 2015 86

PwC Pennsylvania – Sourcing of services Rule #2: Billing Address If the state or states of assignment under Rule #1 cannot be determined for a customer who is an individual that is not a sole proprietor, a service is deemed to be delivered at the customer’s billing address. November 13, 2015 87

PwC Pennsylvania – Sourcing of services Rule #3: Order Location If the state or states of assignment under Rule #1 cannot be determined for a customer, except for a customer under Rule #2, a service is deemed to be delivered at the location from which the services were ordered in the customer’s regular course of operations. If the location from which the services were ordered in the customer’s regular course of operations cannot be determined, a service is deemed to be delivered at the customer’s billing address. November 13, 2015 88

PwC Pennsylvania – Sourcing of services Department of Revenue Interpretation Delivery: Occurring at a location where a person or entity may use the service. -Avoid scenarios where a service is ‘delivered’ to a location that merely serves as a transit point not representative of the market state where the service is used. Third Party Delivery: Whenever a customer contracts with a service provider to have services delivered directly to the customer, the service provider shall source its receipts to the customer’s location of use, regardless of whether the service provider contracts with a third party to complete final delivery to the customer. November 13, 2015 89

PwC Current state Amnesties 90 November 13, 2015

PwC Current state Amnesties StateAmnesty periodProgram summaryEligible taxes and taxpayer AlabamaTwo months in 2016, ending August 31, 2016 100% penalty and 50% interest waiver All taxes administered by ADOR (except motor fuel taxes) that are due prior to January 1, 2015 or taxes for taxable periods that began before January 1, 2015. A three-year look back period applies for all taxes eligible for amnesty. IndianaSeptember 15, 2016 - November 16, 2016 100% penalty and interest waiver Applies to unpaid, as of January 1, 2013, listed taxes, which will be determined by the Department. Participants in previous amnesty programs are barred from participating. Listed taxes include the adjusted gross income tax, gross retail and use tax, financial institution tax, supplemental net income tax, and any other tax and fee that the department must administer. KansasSeptember 1, 2015 – October 15, 2015 100% penalty and interest waiver Applies to several taxes, including income taxes (corporate, personal), sales tax and compensating (use) tax, local sales and use taxes, privilege tax, withholding tax, mineral severance taxes, that are due and unpaid for tax periods ending on or before December 31, 2013. StateAmnesty periodProgram summaryEligible taxes and taxpayer AlabamaTwo months in 2016, ending August 31, 2016 100% penalty and 50% interest waiver All taxes administered by ADOR (except motor fuel taxes) that are due prior to January 1, 2015 or taxes for taxable periods that began before January 1, 2015. A three-year look back period applies for all taxes eligible for amnesty. IndianaSeptember 15, 2016 - November 16, 2016 100% penalty and interest waiver Applies to unpaid, as of January 1, 2013, listed taxes, which will be determined by the Department. Participants in previous amnesty programs are barred from participating. Listed taxes include the adjusted gross income tax, gross retail and use tax, financial institution tax, supplemental net income tax, and any other tax and fee that the department must administer. KansasSeptember 1, 2015 – October 15, 2015 100% penalty and interest waiver Applies to several taxes, including income taxes (corporate, personal), sales tax and compensating (use) tax, local sales and use taxes, privilege tax, withholding tax, mineral severance taxes, that are due and unpaid for tax periods ending on or before December 31, 2013. November 13, 2015 91

PwC Current state Amnesties StateAmnesty periodProgram summaryEligible taxes and taxpayer LouisianaEffective for a period of at least one month in 2015, occurring between 7/1/15 and 12/31/15. Period determined at the discretion of the secretary (not yet announced for 2015) If amnesty application is approved: during 33% penalty waiver and 17% waiver of interest Taxes due prior to 1/1/5, for which the department has issued an individual or a business proposed assessment, notice of assessment, bill, notice, or demand for payment not later than 5/31/15. MarylandSeptember 1, 2015 - October 30, 2015 100% penalty and 50% interest waiver Unpaid liabilities as of December 31, 2014 for: corporate income tax, individual income tax, sales- use tax, withholding tax, and admissions & amusement tax. Agreement can be reached to allow payments under amnesty to be made until December 31, 2016. However interest will accrue on amounts unpaid after October 31, 2015. Amnesty does not apply to any taxpayer previously granted Maryland amnesty from 1999 through 2014; or taxpayers that were eligible to participate in the state's 2004 amnesty with respect to intangible holding companies. StateAmnesty periodProgram summaryEligible taxes and taxpayer LouisianaEffective for a period of at least one month in 2015, occurring between 7/1/15 and 12/31/15. Period determined at the discretion of the secretary (not yet announced for 2015) If amnesty application is approved: during 33% penalty waiver and 17% waiver of interest Taxes due prior to 1/1/5, for which the department has issued an individual or a business proposed assessment, notice of assessment, bill, notice, or demand for payment not later than 5/31/15. MarylandSeptember 1, 2015 - October 30, 2015 100% penalty and 50% interest waiver Unpaid liabilities as of December 31, 2014 for: corporate income tax, individual income tax, sales- use tax, withholding tax, and admissions & amusement tax. Agreement can be reached to allow payments under amnesty to be made until December 31, 2016. However interest will accrue on amounts unpaid after October 31, 2015. Amnesty does not apply to any taxpayer previously granted Maryland amnesty from 1999 through 2014; or taxpayers that were eligible to participate in the state's 2004 amnesty with respect to intangible holding companies. November 13, 2015 92

PwC Current state Amnesties StateAmnesty periodProgram summaryEligible taxes and taxpayer MassachusettsA 60-day period during FY 16, ending no later than 6/30/16. Dates to be set by Commissioner Penalty waiver Scope of amnesty (tax types and periods covered) determined by Commissioner Non-filers will be required to file not more than three years of unfiled returns for any tax year beginning before January 1, 2014., MissouriSeptember 1, 2015, through November 30, 2015 100% penalty and interest waiver Amnesty applies to: Income (corporate/personal), sales-use; corporate franchise taxes Liabilities that remain due and unpaid before 12/31/14 New Hampshire December 1, 2015 - February 15, 2016 100% of penalties and “interest in excess of 50% of the applicable interest rate” Amnesty applies to all taxes administered by the Department of Revenue Administration that are due but unpaid on or before February 15, 2016, regardless whether previously assessed. Legislation also establishes a Voluntary Disclosure Program. November 13, 2015 93

PwC Current state Amnesties StateAmnesty periodProgram summaryEligible taxes and taxpayer OklahomaSeptember 14, 2015 through November 13, 2015 100% penalty and interest waiver Applies to 'eligible taxes' due and payable for any tax period ending before January 1, 2015, including corporate and individual income taxes, bank privilege tax, sales and use taxes, withholding tax, and others. South CarolinaTBD - by the Department of Revenue. Department must notify Legislature of dates at least 60 days prior to start of program authorizes waiver or penalties and interest 'or portion of them' Amnesty applies to taxes imposed under Title 12 (taxes) as well as Title 27 (Property) and Title 61. Tax periods not specified in legislation, Department may impose 10% penalties on overdue tax debts following end of amnesty period. November 13, 2015 94

PwC 2015 amnesty proposals - New Mexico November 13, 2015 95

PwC MTC cases in other states 96 November 13, 2015

PwC MTC cases in other states CA - Gillette Co. v. California Franchise Tax Board, No. A130803 (Cal. Ct. App. Oct. 2, 2012). MTC is a valid compact; compact law supersedes conflicting state law – appealed to the California Supreme Court. In June 2012, California Legislature formally withdrew from the Compact. CA Sup. Ct Oral arguments held 10/6/15; questioning from the bench did not favor Gillette. TX - Graphic Packaging Corp. v. Combs, No. 03-14-00197-CV, Travis Cty. Dis. Ct. (TX 2014). Held franchise tax was not an income tax. On July 28, 2015, Third District of Texas Court of Appeals affirmed. OR - Health Net, Inc. v. Oregon Department of Revenue, T.C.-MD No. 120649D (Sept. 9, 2015). Oregon Tax Court held the MTC Compact was not a binding interstate compact. Not appealed. MN - Kimberly-Clark Corp. v. Comm'r of Rev., MN Tax Ct. Dkt. No.08670 (filed Dec. 12, 2013). On June 19, 2015, Minnesota Tax Court upheld 1987 repeal of election on “unmistakability doctrine.” November 13, 2015 97

PwC Nexus and related developments 98 November 13, 2015

PwC Nationwide trends – Nexus and related developments Economic Nexus and Factor Presence Nexus - Agency November 13, 2015 99

PwC Alabama H.B. 49, signed on August 11, 2015 Effective for tax years beginning after December 31, 2014, the legislation provided a factor presence nexus standard for the business privilege tax, income taxes, and the financial institution excise tax when, in any taxable year, a taxpayer’s in-state property exceeds $50,000; its in state payroll exceeds $50,000; its in-state sales exceeds $500,000; or 25% of its total property, payroll, and sales are attributed to Alabama. These amounts may be adjusted annually based on changes in the Consumer Price Index. November 13, 2015 100

PwC California California Franchise Tax Board, Legal Ruling 2014-01 July 22, 2014 The California Franchise Tax Board provided in a letter ruling, that LLC corporate members are not ‘doing business’ in the state when the LLC’s only California activity consists of: 1.registering to do business or 2.being organized in the state. If the LLC’s only contact with the state is registering or being organized in the state the Corporate LLC members are not subject to the requirement to file a tax return based on ‘doing business’ in the state and are not subject to the state’s franchise tax regime. November 13, 2015 101

PwC Cases – California Harley-Davidson, Inc., et al. v. Franchise Tax Board, Super Ct. No. 37-2011- 00100846-CU-MC-CTL, May 28, 2015 On May 28, 2015, a California Court of Appeals concluded that two corporations with no California physical presence had substantial nexus with California due to the activities of in-state agents. The corporations were established as bankruptcy remote special purpose entities (SPEs) and were engaged in securing loans for their parent and affiliated corporations that did business in California. The court found that a California affiliate was an agent of the SPEs. The court’s conclusion that the agency relationship created California nexus for the SPEs satisfied both Due Process and Commerce Clause concerns. November 13, 2015 102

PwC Cases – California Harley-Davidson, Inc. v. Franchise Tax Board, California Supreme Court, No. S227652, petition for review denied, September 16, 2015 The California Supreme Court denied the taxpayer’s petition for review of a court of appeal decision holding that two corporations with no California physical presence had substantial nexus with California due to the activities of in-state agents. The corporations were established as bankruptcy remote special purpose entities (SPEs) and were engaged in securing loans for their parent and affiliated corporations that did business in California. The appellate court found that a California affiliate was an agent of the SPEs. The court’s conclusion that the agency relationship created California nexus for the SPEs satisfied both Due Process and Commerce Clause concerns. November 13, 2015 103

PwC Cases – California Swart Enterprises, Inc. v. California Franchise Tax Board, Superior Court of California, Fresno County, No, 13CECG02171, November 14, 2014 A California trial court held that a corporate taxpayer was not doing business in California based on its 0.2% interest in an LLC that leased and disposed of interests in California capital equipment. The taxpayer had no connection to California aside from its LLC interest. The court held that the doing business exception is dependent on a limited partner’s lack of right to manage or control the decision making process of the entity. November 13, 2015 104

PwC Cases – Illinois Capital One Financial v. Hamer, 2012-TX-0001/02, May 12, 2015 The Illinois Circuit Court ruled on summary judgment that the proper test for income tax substantial nexus is whether a ‘significant economic presence’ exists in the state. The test, adopted in West Virginia Tax Commissioner v. MBNA, incorporates a ‘purposeful direction’ inquiry similar to a Due Process Clause analysis, coupled with an examination of "the frequency, quantity, and systematic nature of a taxpayer's economic contacts with a state. The court found the taxpayer had a significant economic presence in Illinois because it: -Collected millions of dollars in fees and interest from Illinois residents -Systematically and continuously solicited Illinois customers to apply for credit -Used the Illinois courts to recover debts -Filed and enforced judgment liens in the state. November 13, 2015 105

PwC Cases – Maryland Gore Enterprise Holdings, Inc. v. Comptroller of the Treasury, Md. Ct. App., No 36, March 24, 2014 The Maryland Court of Appeals ruled that two subsidiaries of an in-state parent had nexus with Maryland because the subsidiaries had no real economic substance as business entities separate from their parent. The court rejected the lower court’s ruling that established nexus between Maryland and the subsidiaries due to their unitary relationship with their in-state parent. Although rejecting unitary nexus, the entities’ unitary relationship justified the state applying to the subsidiaries an alternative apportionment formula that incorporated unitary elements. November 13, 2015 106

PwC Cases – Maryland ConAgra Brands, Inc v. Comptroller of the Treasury, Md Tax. CT. No. 09-IN- OO-0150, February 24, 2015 The Maryland Tax Court found that an out-of-state intangible holding company had nexus with the state. Concluding that the IHC had no “real economic substance as a business separate from” its in-state affiliates. The court noted that functional integration and control existed through stock ownership and common employees, directors, and officers. The functional source of the IHC’s income was derived from the ideas and discoveries generated by in-state affiliates. The facts also indicated the IHC’s reliance on in-state affiliate corporate personnel, office space, and corporate services. November 13, 2015 107

PwC Cases – Massachusetts Allied Domecq Spirits & Wines USA, Inc. v. Massachusetts Commissioner of Revenue, Massachusetts Appeals Court, No. 13-P- 984, (6/18/14) The transfer of Massachusetts employees from an in-state company to its out-of-state parent was disregarded for tax purposes. The transfer, which established Massachusetts nexus for the parent and caused the parent to be included in the ‘nexus combined’ corporate excise tax return, allowed the parent’s losses to offset the income of other members of the nexus combined group. The Board found that, pursuant to the sham transaction doctrine, the transfers had no valid business purpose other than tax avoidance. November 13, 2015 108

PwC Cases – New Jersey Spring Licensing Group, Inc. v. Director, Division of Taxation, N.J. Tax Court, No. 010001-2010, August 14, 2015 The New Jersey Tax Court ruled that an out-of-state company had a Corporate Business Tax reporting responsibility and had to pay tax on royalty income despite an in-state affiliate adding back royalty expense paid to the company. The court disagreed that the prospect of double taxation precludes the company’s New Jersey filing obligation. The court suggested that the potential for double taxation is alleviated by the payor seeking an exception to the addback or the payee seeking alternative apportionment relief. November 13, 2015 109

PwC Cases – Wisconsin Skechers USA, Inc. II v. Wisconsin Department of Revenue, Wis. Tax App. Comm’n No.10-1-173, July 31, 2015 The Wisconsin Tax Appeals Commission concluded that the state did not have the statutory authority to impose its income or franchise tax on an out-of-state company licensing intangible property to its in-state affiliate because none of its income would be apportioned to Wisconsin under the sales factor. No income would be sourced to Wisconsin because the company’s costs of performing such licensing were outside Wisconsin. The Commission did not reach the issue regarding whether the out-of-state company had nexus with Wisconsin due to its licensing of intangible property to its in- state affiliate. An assessment against the in-state affiliate remains in abeyance pending the final outcome of this case. The Commission noted that the Department reserved arguments attacking the structure of this transaction and disallowing deductions for the proceedings against the in-state affiliate. November 13, 2015 110

PwC Questions 111 November 13, 2015

PwC Contact us… 112 Eric Burkheiser Partner, PwC eric.v.burkheiser@pwc.com (313) 394-6407 Brad Danton Partner, PwC Stephen.b.danton@pwc.com (312) 298-2577 Mike Kammann Director, PwC Michael.w.kammann@pwc.com (313) 394-3382 eric.v.burkheiser@pwc.com Stephen.b.danton@pwc.com Michael.w.kammann@pwc.com Diane Molesky Director, Masco Corporation Diane_molesky@mascohq.com (313) 392-6338 Tim Pratcshler Partner, PwC timothy.s.pratcshler@pwc.com (313) 394-6508 timothy.s.pratcshler@pwc.com Patty Jo (PJ) Sheets Director, PwC patty.jo.sheets@pwc.com patty.jo.sheets@pwc.com (312) 298-4340 November 13, 2015

PwC Appendix 113 November 13, 2015

PwC Other recent Michigan Cases Addressing SaaS 114 November 13, 2015

PwC Cloud Computing Cloud computing services not taxable in Michigan Online services related to electronic data interchanges, the electronic translation of data, and the synchronization, storage and retrieval of data, are not subject to Michigan use tax. The software used to provide the services was hosted on the taxpayer’s servers located outside of Michigan, and no underlying software or software code was installed or downloaded to Michigan customers' computers or servers in connection with the transactions. The court of claims concluded that the computer software was not ‘delivered by any means’ and therefore was not subject to tax. The court disagreed with the Department's argument that the Michigan customers ‘accessed the functionality’ of the software, and therefore made requisite use of the software for use tax purposes. GXS Inc. v. Department of Treasury, Michigan Court of Claims, No. 13-000181-MT (3/4/2015) 115 November 13, 2015

PwC Cloud Computing Online information service not taxable in Michigan The Michigan Court of Claims held that charges by an accounting firm for an online information service, Checkpoint, were not taxable. The court concluded that the service was not tangible personal property that was “delivered.” In addition, the court disagreed with the Department's argument that mere "access" to computer servers equates with "use." Although computer software was involved in most of the transactions in question, there is no evidence in the record that the taxpayer exercised a right or power incident to ownership in the underlying software. At the most, the taxpayer accessed Checkpoint's computer power and controlled the output of research information by entering research terms. But the taxpayer had no control over the underlying software that may have been used by Checkpoint to complete the necessary tasks. Rehmann Robson & Co. PC v. Dep't of Treasury; Case No. 12-000098-MT (11/26/2014) 116 November 13, 2015

PwC Other States Weigh-in on Transmission of Electricity 117 November 13, 2015

PwC Manufacturing/Processing Exemption Transmission of electricity taxable in Maryland The Maryland Tax Court held that the transmission of electricity is not considered processing and therefore is not exempt from sales and use tax. The taxpayer contended that the ‘processing’ that takes place in the course of transmitting electricity is similar to the ‘processing’ that takes place in the generation of electricity. However, the court disagreed, citing Maryland law stating that “a transportation service for the transmission, distribution, or delivery of electricity or natural gas” is included in the definition of ‘taxable service.’ Thus, the transmission of electricity is a taxable service and not a production activity. The Potomac Edison Company v. Comptroller of the Treasury, Maryland Tax Court, No. 12-SU-OO-0644 (1/22/2015) November 13, 2015 118

PwC Manufacturing/Processing Exemption Electricity distribution system not eligible for the manufacturing exemption in Georgia An electricity producer’s purchases of machinery and equipment used in the transmission and distribution system do not qualify for the manufacturing exemption. The Georgia Tax Tribunal held that the transmission and distribution system is not used for “manufacturing” electrical energy. Although the undisputed evidence shows that the transmission and distribution system is tightly integrated with the generating facilities and is integral to the delivery of electric energy, it is not integral and necessary to the production, i.e. ‘manufacturing’ of that electric energy. It is rather, just what its name indicates, a system for the distribution and delivery to the end-user customers of the electrical energy that is manufactured at a generating facility. Georgia Power Company v. MacGinnitie, Georgia Tax Tribunal, Docket No. TAX- S&UT-1403540, Decision 2015-01 (1/5/2015) November 13, 2015 119

PwC Manufacturing/Processing Exemption Electricity manufacturer’s equipment partially exempt in Indiana A manufacturer who develops solar power plants to produce electricity would be eligible to take the manufacturing exemption on the acquisition of the modules, racking, and inverters. Each of these parts is an essential and integral part of an integrated process which produces (or will produce) the electricity. However, transformers are not eligible for the manufacturing exemption since the taxpayer's use of transformers is not a continuation of the industrial production process, but merely part of the transmission and distribution process. Similarly, monitoring equipment is not directly used in the direct production of electricity and is therefore subject to tax. Indiana Revenue Ruling ST 14-03 (12/05/2014, released 12/31/2014) November 13, 2015 120

PwC Recent Developments in Sales and Use Tax Nexus 121 November 13, 2015

PwC Attributional Nexus – Colorado US Supreme Court - Federal Tax Injunction Act does not bar federal court review of Colorado's sales and use tax notice and reporting law On March 3, 2015, the US Supreme Court held that the Tax Injunction Act does not bar federal court review of Colorado's sales and use tax notice and reporting law. The Act precludes federal court proceedings that would "enjoin, suspend or restrain the assessment, levy or collection of any tax under State law." The Court found that the information gathering requirements of Colorado's law encompassed activities occurring prior to the assessment, levy, or collection of state tax and, therefore, the Act did not preclude federal litigation challenging the state law. Additionally, the petitioner's challenge merely 'inhibited' and therefore did not 'restrain' the collection of Colorado's sales and use tax. While expressing no opinion on the outcome, the Court reasoned that it was a decision for the lower court to determine whether the doctrine of 'comity' could serve as a vehicle for the lower court to dismiss the action. Direct Marketing Assoc. v. Brohl, US Sup. Ct. No. 13-1032 (3/3/2015) Please note that on April 13, 2015, the Tenth Circuit Court of Appeals ordered the parties in Direct Marketing Association v. Brohl to file briefs on the commerce clause and comity issues in light of the US Supreme Court ruling. The state of Colorado has 30 days to file an opening brief and DMA must respond within 20 days. November 13, 2015 122

PwC Attributional Nexus – US Supreme Court US Supreme Court – Justice Kennedy’s concurrence opinion advocates reexamination of Quill and Bellas Hess While acknowledging that the instant case does not raise an issue regarding the physical presence nexus requirement stated in Quill v. North Dakota, Justice Kennedy wrote in a concurrence that this case provides “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.” Justice Kennedy noted that the Quill Court should have reevaluated the sales and use tax physical presence requirement “in view of the dramatic technological and social changes that [have] taken place in our increasingly interconnected economy. There is a powerful case to be made that a retailer doing extensive business within a State has a sufficient ‘substantial nexus’ to justify imposing some minor tax-collection duty, even if that business is done through mail or the Internet.” Kennedy went on to say that “[g]iven these changes in technology and consumer sophistication, it is unwise to delay any longer a reconsideration of the Court’s holding in Quill. A case questionable even when decided, Quill now harms States to a degree far greater than could have been anticipated earlier. It should be left in place only if a powerful showing can be made that its rational is still correct.” Direct Marketing Assoc. v. Brohl, US Sup. Ct. No. 13-1032 (3/3/2015) November 13, 2015 123

PwC Attributional Nexus – Colorado US District Court: Challenge to Use Tax Reporting Requirement - History Direct Marketing Association filed suit against the state, claiming that notice and reporting requirements for out-of-state sellers were unconstitutional (Direct Marketing Assoc. v. Huber, US Dist. Ct., Dist. Co., No. 10-cv-01546-REB-CBS (1/26/11)). Effective March 30, 2012, a US District Court Judge issued a permanent injunction, barring Colorado from enforcing its sales and use tax notice and reporting requirements for out-of-state sellers. On December 10, 2013, the federal District Court of Colorado formally dissolved the previously issued injunction against enforcement of Colorado's use tax notice and reporting law and dismissed the DMA's Commerce Clause claims against Colorado. On June 2, 2014, DMA filed a motion for summary judgment urging the Colorado District Court to permanently enjoin the notice requirements. On March 3, 2015, the US Supreme Court ruled that the Federal Tax Injunction Act does not bar federal court review of Colorado's sales and use tax notice and reporting law. On April 13, 2015, the Tenth Circuit Court of Appeals ordered the parties in Direct Marketing Association v. Brohl to file briefs on the commerce clause and comity issues. The state of Colorado filed a supplemental brief on May 13, 2015 and DMA filed a response brief on June 9, 2015. November 13, 2015 124

PwC Economic Nexus – Alabama Alabama adopts economic nexus regulation On September 17, 2015, Alabama Department of Revenue Commissioner Julie Magee signed a controversial economic nexus regulation targeting out-of-state retailers with substantial sales in the state. The new rule, which is scheduled to take effect January 1, 2016, will establish economic nexus for out-of-state sellers who lack an Alabama physical presence but who are making retail sales of greater than $250,000 of tangible personal property into the state and conduct certain additional activities in the state as stipulated in Alabama code section 40-23-68. The regulation is in direct challenge with the physical presence requirements outlined in Quill. Reg. 810-6-2-.90.03, adopted 9/17/2015 November 13, 2015 125

PwC Attributional Nexus – Alabama Alabama adopts Non-Nexus Use Tax Remittance Program On June 4, 2015, Alabama passed legislation which will provide an ‘easily-accessible method’ for non-nexus sellers to remit use tax on behalf of their customers on items delivered into Alabama. According to the legislation, non-nexus sellers can elect to register, collect and remit use tax on sales to Alabama customers at a flat 8% rate. This tax will satisfy all tax obligations on the transaction. As an incentive to participate, the non- nexus sellers may keep 2% of taxes collected. In order to stay ‘grandfathered’ into the program, non-nexus sellers need to be registered and remitting taxes at least six months prior to adoption of any federal legislation (e.g., MFA) requiring remote or non-nexus sellers to collect and remit Alabama’s sales or use taxes. The legislation will go into effect on October 1, 2015. SB 437, passed on 6/4/2015; See also Notice, Alabama Dept. of Revenue (9/4/2015) November 13, 2015 126

PwC Attributional Nexus – Texas Software licensed to Texas customer creates nexus The Texas Comptroller of Public Accounts determined that electronically downloaded software licensed by a Utah corporation to Texas customers constituted physical presence in Texas sufficient to establish sales and use tax nexus. According to the decision, nexus was established because the software was characterized as tangible personal property and the Utah corporation retained all property rights in the software, which was physically present and generating revenue in Texas. The Comptroller upheld an ALJ determination that the corporation had an obligation to charge and collect use tax from customers, and denied refund claims of sales tax paid and an interest waiver. Texas Comptroller’s Decision 106,632 (9/19/2014, released 11/5/2014) November 13, 2015 127

PwC 2015 Attributional Nexus Legislation StateBillIntroducedFurther actionNexus provisions LouisianaHB 355/HB 5554/13/15Approved by House 5/13/15 Approved by Senate Committee 5/25/2015 Vetoed by Governor 6/19/15 Affiliate MarylandHB 7262/13/2015Click-through MichiganSB 658/65910/31/13Signed by Governor 1/15/15Click-through and affiliate NevadaSB 382 SB 380 3/27/2015 3/17/2015 Approved by Senate 4/21/15 Signed by Governor 5/27/2015 Click-through and affiliate OhioHB 232 HB 64 5/27/15 Signed by Governor 6/30/2015 Click-through South CarolinaSB 1701/13/15Approved by Senate on 5/12/15Click-through TennesseeSB 603/HB 6442/10/15Enacted 5/20/15Click-through WashingtonSB 5541 HB 2224 HB 2269 SB 6138 1/23/15 3/27/2015 6/22/2015 6/25/2015Signed by Governor 7/1/2015 Click-through Click-through and affiliate Click-through November 13, 2015 128

PwC 2014 Attributional Nexus Legislation StateBillIntroducedFurther actionNexus provisions ColoradoHB 12692/4/14Amended to exclude (click-through) affiliate marketers Signed by Governor 6/6/14 Affiliate HawaiiHB 1651Prefiled 1/13/14Approved by House 3/4/14Click-through and affiliate IllinoisSB 3521/23/13Approved by Governor 8/26/14Click-through IndianaSB 2691/13/14Dead on adjournment 3/14/14Click-through and affiliate MichiganHB 4022/42032/6/13Preliminary approval in House 12/9/14 Click-through and affiliate New JerseyAB 34866/23/14Signed by Governor 6/30/14Click-through PennsylvaniaHB 21033/17/14Notice requirement South CarolinaSB 8701/14/14Click-through TennesseeHB 1537 SB 2298 1/16/14 1/23/14 Click-through and affiliate November 13, 2015 129

PwC Digital Goods 130 November 13, 2015

PwC Sales Base Digital Goods Digital Goods Non-Taxable Digital Goods Taxed by Statute Digital Goods Taxed by DOR Position or Case Law WA ID AZ NM LA AL ME HI CT DE MA AK AR CO MD CA KS FL GA IA IL MI MN MO MT NC SC VA WV WY OK NY PA OR ND NV NH OH RI VT NJ TX UT SD NE MS TN KY IN WI DC November 13, 2015 131

PwC Digital Goods Virtual Currency Michigan Treasury Update – Vol. I, Issue 1, November 2015 Virtual currency is a digital representation of value that has an equivalent value in currency, such as the United States Dollar (USD). A prominent example of convertible virtual currency is Bitcoin, a form of e-currency that started in 2008. A taxpayer accepting virtual currency in a retail sale transaction must convert the value of the virtual currency to USD as of the day and the exact time of the transaction. The taxpayer accepting virtual currency must also maintain documentation demonstrating the value of the virtual currency on the day and at the exact time of the transaction. Virtual currency itself is not tangible personal property for purposes of the Sales Tax. Therefore, purchases of virtual currency as contrasted with purchases made with virtual currency are not subject to sales or use tax. November 13, 2015 132

PwC Digital Goods Membership fee subject to tax in New York The New York Commissioner ruled that an Internet retailer’s annual membership fee is subject to the sales and use tax. The membership fee includes free two-day shipping and other discounted shipping benefits, access to streaming videos and a lending library of e- books, and special member pricing. The Commissioner concluded that the shipping benefit is a taxable benefit because it entitles a member to receive a discount on the delivery charge for a purchased item that is presumed to be subject to New York’s sales or use taxes. Therefore, the fee for the membership program is a prepayment for a taxable item and is subject to tax. The fact that the fee for the membership program also entitles the member to receive benefits that are not subject to tax does not change this result. TSB-A-15(15)S, New York Commissioner of Taxation and Finance (3/24/2015; released 6/10/2015) November 13, 2015 133

PwC Digital Goods Subscription fee taxable in Arizona The Arizona Department of Revenue ruled that subscription membership charges are subject to the transaction privilege tax under the personal property rental classification. The single fee subscription membership includes access to instant video, e-books, and free shipping. The subscription membership charge is not bifurcated for each component—the member could use his or her subscription membership to only watch instant videos. As a result, the Department concluded that the total amount of the subscription membership fee is subject to tax under the personal property rental classification because it is a single fee bundled transaction involving taxable personal property rental components, including shipping, instant video and e-book library. However, free trial subscriptions are not subject to tax because there is no gross receipts. Arizona Private Taxpayer Ruling LR14-001 (4/14/2014, released 5/28/2015) November 13, 2015 134

PwC Digital Goods Chicago extends amusement tax to online amusements The Chicago Department of Revenue issued a ruling clarifying that the city’s amusement tax applies not only to charges paid for the privilege to witness, view or participate in amusements in person but also to charges paid for the privilege to witness, view or participate in amusements that are delivered electronically. Therefore, the following transactions are taxable if delivered to customers within the city: charges paid for the privilege of watching electronically delivered television shows, movies or videos charges paid for the privilege of listening to electronically delivered music; and changes paid for the privilege of participating in games, on-line or otherwise The amusement tax does not apply to sales of shows, movies, videos, music or games which are permanently downloaded. It applies only to rentals (normally accomplished by streaming or a "temporary" download). The ruling is effective September 1, 2015. Chicago Dept. of Revenue Amusement Tax Ruling No. 5 (6/9/2015) Please note that on September 9, 2015, the Liberty Justice Center filed suit on behalf of consumers asserting the city of Chicago has exceeded its authority by extending the amusement tax to streaming services. November 13, 2015 135

PwC Qui Tam and Class Action Lawsuits 136 November 13, 2015

PwC Qui Tam Cases Overview What is a qui tam case? When is it used? Is it new? Are these kinds of cases appropriate for the state tax arena? For a history of qui tam and a discussion of the positives and negatives of qui tam litigation in state taxes, please click here for a tax analyst article. A response to the article can be found here. An additional article with a proposed solution from the American Bar Association can be found here.here The Multistate Tax Commission work group is studying two approaches to tax whistleblowers to determine which should be used as a template for a state model. During the MTC's winter committee meetings March 9-12, 2015, members of the Uniformity Committee expressed support for developing a whistleblower model based more on the IRS program than on New York's False Claims Act litigation approach, especially in the context of transaction taxes. For tax analyst articles on this topic, please click here and here.herehere. November 13, 2015 137

PwC Class Action Suit Class action suit against Whole Foods dismissed On October 14, 2015, the US District Court in Illinois dismissed a class action suit brought against Whole Foods for improperly collecting sales tax when customers used coupons. The dismissal came nearly two months after the parties reached a ‘settlement in principle.’ The original suit was filed on January 28, 2015. The plaintiff made a purchase at an Illinois Whole Foods store, paying $7.39 in cash and also using a $15 Whole Foods coupon, but was charged sales taxes on the entire purchase price, not just the cash amount paid. Under Illinois law, sales taxes should not be charged on purchases made with coupons when the retailer does not receive reimbursement for the coupon. Please note that on June 15, 2015, the US District Court granted a motion to dismiss the plaintiffs' unjust enrichment, but allowed the plaintiffs' other claims to move forward. Wong v. Whole Foods Mkt. Grp. Inc.; Case No. 1:15-cv-00848, US District Court for the Northern District of Illinois (filed 1/28/2015, amended suit filed on 6/30/2015, settlement reached on 8/20/2015) November 13, 2015 138

PwC Qui Tam Cases Class action suit filed against Costco for overcollection of sales tax On May 8, 2015, a class action suit was filed in the US District Court for the Northern District of California against Costco. The plaintiffs allege that Costco overcollected sales tax on discounted merchandise. When customers purchase items subject to a ‘Manufacturer's Instant Rebate’ and/or ‘Instant Savings,’ Costco collects sales tax reimbursement from the customers based on the pre-discount price of the item instead of the discounted price the members actually paid. This treatment would be correct if Costco always received rebates from the manufacturers. Plaintiffs believe, however, that in many cases Costco does not actually receive rebates from its manufacturers, or any other third party, and therefore should not be collecting tax on the pre-discounted price. Brooks v. Costco Wholesale Corp.; 3:15-cv-02098-MEJ (filed on 5/8/2015) November 13, 2015 139

PwC Class Action Suit Preliminary settlement reached in Wal-Mart class action suit On April 30, 2015, a preliminary settlement was reached in a class action suit regarding refunds for purchases made in one county and returned in another. Both Wal-Mart and the plaintiffs had filed motions for summary judgment on March 27, 2015. Plaintiffs purchased items at Wal-Mart stores in Ohio and paid sales taxes on the purchases. Plaintiffs then returned the merchandise to Wal-Mart stores in different counties. Upon return of the items, Wal-Mart would only refund sales taxes at the rate used in the area where the merchandise was returned, even though Plaintiffs brought receipts showing that they had paid higher sales taxes in a different county at the time of purchase. Plaintiffs claim this practice is in breach of Wal-Mart's contractual agreement to give full refunds for returns made within 90 days. Previously, on January 16, 2015, the US District Court for the Northern District of Ohio denied Wal-Mart's motion to dismiss the suit. Brandewie v. Wal-Mart Stores Inc.; Case No. 1:14-CV-965, US District Court for the Northern District of Ohio (motion to dismiss denied 1/16/2015) November 13, 2015 140

PwC Qui Tam Cases Illinois introduces legislation to limit application of the False Claims Act to tax Legislation has been introduced in Illinois to curb the power of whistleblowers to apply Illinois's False Claims Act to tax. HB 2803, and its companion bill SB 1828 would amend the Illinois False Claims Act to provide that no court could have jurisdiction over a civil action relating the act to tax unless the action is brought by the attorney general. In addition, only the Department of Revenue could bring administrative action relating to the False Claims Act. Another bill, HB 2813, would establish a whistleblower program within the DOR, allowing it to reward persons with legitimate claims. This is an issue that many states around the country are struggling with, but one that has been particularly pervasive in Illinois, with over 400 active cases under the False Claims Act. November 13, 2015 141

PwC Class Action Suit Class action suit filed against Target for over collection of sales tax On March 5, 2015, a class action suit was brought against Target for improperly collecting sales tax when customers use coupons. The plaintiff made a purchase of a product for $9.95 at an Illinois Target store. The plaintiff used a $1-off coupon, paying $10 in cash, getting back $.83, but was charged sales tax on the entire purchase price of $9.95 instead of the $8.95 after-coupon price. Under Illinois law, sales tax should not be charged on purchases made with coupons when the retailer does not receive reimbursement for the coupon. The plaintiff claims Target is engaged in unfair and deceptive acts and practices by overcharging plaintiff and other consumers on sales tax. Wong v. Target Corp.; Case No. 1:15-CV-01985, U.S. District Court for the Northern District of Illinois (filed 3/5/2015) November 13, 2015 142

PwC Class Action Suit Papa John’s reaches tentative settlement in Florida class action suit Papa John's International Inc. has tentatively reached a settlement in a class action lawsuit over its alleged unlawful collection of sales tax on delivery fees. On February 17, 2015, the US District Court Judge Virginia Hernandez Covington remanded the case to state court following a motion and several memos that were filed with the court last week. The class action suit was initially brought against Papa John's in state court on April 3, 2014. The plaintiffs have alleged that Papa John's overcharged customers $5 million in sales tax on delivery fees. A similar lawsuit is ongoing in Illinois. (Schojan et al. v. Papa John's International Inc. et al.; Case 8:14-cv-01218-VMC-MAP; 14-CA- 003491, filed on 4/3/2014) November 13, 2015 143

PwC Federal Legislation 144 November 13, 2015

PwC Federal Legislation Extension of Internet Tax Freedom Act On September 30, 2015, President Obama signed the Continuing Appropriations Act of 2016, which includes provisions extending the Internet Tax Freedom Act (ITFA) through December 11, 2015. ITFA was scheduled to expire October 1, 2015. The ITFA extension was included in a temporary spending bill introduced to avoid a government shutdown. The Internet Tax Freedom Act Amendments of 2007 extended to October 1, 2015, a moratorium on the state and local taxation of Internet access and on multiple and discriminatory taxes on electronic commerce. While another extension of the ITFA remains popular, most debate focuses on whether to make it permanent and whether the grandfather clause permitting some states to continue taxing Internet access should be retained. Amendment 2689 to H.R. 719, enacted on 9/30/2015 November 13, 2015 145

PwC State Guidance Related to the ITFA expiration States issue guidance related to Internet access charges States have begun to issue guidance on the taxability of Internet access charges if the Internet Tax Freedom Act (ITFA) is allowed to expire. Alabama: Internet access charges will continue to be exempt until further notice by the Department. Notice, Alabama Department of Revenue (10/10/2014) District of Columbia: Sales of Internet access charges are excluded from taxation under current law and will not be taxable if the ITFA expires. Dist. of Columbia Revenue Notice 2015-05 (9/24/2015) Georgia: Internet access charges are currently nontaxable and will not be taxed if the ITFA moratorium expires. Policy Bulletin SUT-2014-01, Georgia Department of Revenue (8/28/2014); Letter Ruling SUT 2014-13 (9/23/2014) Indiana: Internet access charges exempted by statute effective 4/23/2015. SB 80, Laws 2015 Kansas: Internet access charges are not currently taxable and will remain nontaxable unless Kansas law is changed. Private Letter Ruling No. P-2014-003, Kansas Department of Revenue (8/26/2014); Kansas Opinion Letter O-2015-001 (9/16/2015) Massachusetts: Vendors may continue to rely on the lists of taxable and nontaxable services including Internet access charges, as published in TIR 05-8, until further notice. Massachusetts Technical Information Release 14-10 (9/11/2014); Massachusetts Technical Information Release 15-8 (9/8/2015) 146 November 13, 2015

PwC State Guidance Related to the ITFA expiration States issue guidance related to Internet access charges (cont.) Michigan: A service that directly enables users to connect to the Internet is not subject to the sales tax. Guidance on Expiration of Federal Moratorium on State Taxation of Internet Access Charges, Michigan Dept. of Treasury (9/24/2014) Nebraska: Internet access is not subject to tax. General Information Letter 1-14-2, Nebraska Department of Revenue (8/22/2014) North Carolina: Internet access will remain nontaxable; however, telecommunications charges to Internet service providers for use in providing Internet access will be subject to tax. Important Notice: Internet Tax Freedom Act, N.C. Dept. of Rev. (12/10/2014) Washington: In response to an informal survey the State has indicated that if ITFA expires, Internet access services would become subject to the state's retail sales and use taxes under RCW 82.04.297(2)(b). Wisconsin: Internet access charges are currently taxable and will remain taxable. Wisconsin Dept. of Rev. Sales and Use Tax Report 3-14 (9/1/2014) In an informal survey, 10 additional states (AR, IA, KY, MN, NV, NJ, RI, UT, VT, and WY) indicated that Internet access charges will not become subject to tax if the ITFA expires. However, Montana indicated that it will begin to collect tax if the ITFA is allowed to lapse. 147 November 13, 2015

Thank you... This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors. 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. © 2015 PwC. All rights reserved. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details.

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