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State & Local Tips & Considerations
www.pwc.com/il
Alon Sherer, Senior International Tax Manager, PwC Israel Larry Croock, State & Local Tax Manager, PwC Israel
November 25, 2014
PwC Israel
Agenda
I. Nexus
II. Sales Tax Trends/Hot Topics
III. Credits & Incentives
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The world of state taxes
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Income Tax Gross
Receipts Tax
Sales Tax
Use Tax
Franchise Tax
Property Tax
Payroll Tax
ABC & Co.
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The world of state taxes
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ABC & Co.
Income Tax
Apportionment Combined/Separate Reporting
Worldwide vs Water’s-Edge Credits & Incentives
Sales Tax
Taxable or Exempt Retail or Wholesale
Local Taxes Sourcing
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What exactly is nexus and why is it important?
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Nexus - Background
• The States’ right to tax interstate commerce is supported by twoclauses in the US Constitution
- The Commerce Clause
- The Due Process Clause
• Under both clauses, a State has a right of taxation only when there issufficient connection, or “Nexus” to the State
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Notable Activities Which May Create Nexus
Office (corporate, home-office)
Employees (work, not residence)
Inventory
Capital equipment (land or fixed assets)
Agents/contractors
De-minimis – varies from state to state
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Salesmen Travelling
Example: TX salesman travels to customers throughout the SW region.
Nexus in 10 states thanks to 1 TX resident!
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CA
AZ
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Solicitation Activities
Public Law 86-272 (P.L. 86-272)
In-state solicitation - activities of employees engaged in interstatecommerce are limited to the mere solicitation of sales of tangible personal property, provided that the employees send the orders out of state for approval and processing
Does NOT apply to sales tax, gross receipts tax or capital taxes
Does NOT apply to foreign commerce
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Permanent Establishment vs. Nexus
P/E is not a state tax concept
States do not generally adopt U.S. tax treaties
Example:
Co. ABC domiciled in Israel holds inventory on consignment in NY
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Israel Co. Israel Co.
Federal Tax No P/E
State Tax Nexus
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Beyond Physical Presence Nexus
• Economic nexus / Factor presence nexus
• Attributional/Affiliate Nexus
Nexus in NY & TXX Nexus in NY & TXX
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US Sub 1 NY
US Sub 2 TX
Israeli Co.
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Nexus impacts you in more ways than one
It is important for a corporation to evaluate and determine nexus forthe following main reasons:
• Liability @ corporate level
• Personal liability for corporate officers
• Statute of limitations
• Understating/overstating tax liabilities
• FAS 109, FIN 48
• Due diligence
• Compliance cost
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Sales & Use Tax Collection
Nexus determines which party remits the tax to the tax authority
Example:
Nexus = Sales Tax No Nexus = Use Tax
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NY Co.
Customer in NY
CA Co.
Customer in NY
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Uncollected Use Tax on Remote Sales – TY 2012
Non-Electronic
Business to Customer Non-electronic Business
to Business
Electronic Business to
Business and Business to
Customer Total
Total 6,800,214,113 5,067,095,451 11,392,700,000 23,260,009,564
California 1,136,801,607 1,118,366,340 1,904,500,000 4,159,667,947
Texas 519,552,484 387,138,109 870,400,000 1,777,090,593
New York 516,559,974 384,908,277 865,500,000 1,766,968,251
Florida 479,769,709 200,120,301 803,800,000 1,483,690,010
Illinios 302,507,519 249,542,069 506,800,000 1,058,849,588
Georgia 244,857,701 182,452,688 410,300,000 837,610,389
Louisiana 236,320,247 176,091,110 395,900,000 808,311,357
Tennessee 245,209,761 92,471,128 410,800,000 748,480,889
Arizona 220,741,594 118,086,660 369,800,000 708,628,254
Pennsylvania 206,483,165 153,858,377 345,900,000 706,241,542
Ohio 183,775,298 136,937,891 307,900,000 628,613,189
Washington 168,284,660 90,784,044 281,900,000 540,968,704
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Source - National Conference of State Legislatures, University of Tennessee Study, 2012
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Click-Through Nexus
AK
HI
MA
ME
RI
VT NH
NY CT
PA
NJ
MD DE
VA
WV
NC
SC
GA
FL
IL OH
IN
MIWI
KY
TN
AL MS
AR
LA TX
OK
MOKS
IA
MN ND
SD
NE
NM AZ
CO
UT
WY
MT
WA
OR
ID
NV
CA
DC
States that have enacted click-through legislation
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Trends – Click-Through Nexus
Amazon Law
Vendor presumption (solicitationthrough online links)
New York-based companies provided(paid) online links to Amazon’s website, which New York customers accessed when purchasing products. Amazon was deemed to have “click-through” nexus in New York.
NY Supreme Court declined to review
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Federal Legislation: Marketplace Fairness Act
Marketplace Fairness Act of 2013, S 743
Introduced 2/14/2013 as S. 336; reintroduced as S. 743, approved by Senate 69-27 on 5/6/2013;
Enforce the collection of sales tax by sellers
• Remote sales
• Specified states
• Small Seller Exception
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Trends – Taxation of Digital Goods
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What is a digital good?
E-books
Music
Information Services
Software/SaaS
Why does it matter?
Need to know what it is before we can determine how it will be taxed
States moving toward taxation of “digital goods” as new revenuesource
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Taxability of 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
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Classification of SaaS
States are taking different approaches with SaaS.
Electronically delivered software
Non-taxable information or data processing service
Taxable information or data processing service
Nothing: state does not tax electronically delivered software orinformation/data processing services
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Taxation of SaaS / Software
Examples of state & local taxation of software/SaaS:
• 1% Connecticut tax rate on computer & data processing
• Texas allows for a 20% discount on the taxable amount forinformation & data processing services
• 8% City of Chicago personal property lease transaction tax (relevantwhen the state exemption applies to licenses of software)
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PwC Slide 22
Final Tips & Considerations
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Tips & Considerations
Nexus analysis/study
Product/Service is taxable or not?
Sales for resale, drop-shipments, sourcing
Use tax exposure
Options to file VDAs and/or amnesty programs
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California Credits
New Employment Credit (NEC)
• Administered by Franchise Tax Board (FTB)
• Net increase in full-time California employees
• Designated geographic areas ONLY!
• Tentative credit reservation must be received from the FTB 30 days after employee/new hire registration
California Competes Tax Credit
• California Governor’s Office of Business & Economic Development (Go-Biz)
Manufacturing Partial Sales Tax Exemption
• Administered by Board of Equalization (BOE)
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Start-UP New York (SUNY)
• Colleges and universities with designated tax free zones in New York
• Businesses must support the academic mission of the college or university (i.e. research, internships)
• Businesses must be NY start-ups, expanding in NY, or relocating to NY (creating new jobs is the key!)
• Not relevant to retailer/wholesale businesses
• A business must be a start-up OR a “high-tech” business in order to operate in NYC
NO NY TAXES FOR 10 YEARS!!
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account any objectives, financial situation or needs of any recipient. Any recipient should not act upon the information contained in this publication without
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Thank You!
Alon Sherer, International Tax Manager, PwC Israel 03-7954520 [email protected]
Larry Croock, State & Local Tax Manager, PwC Israel 03-7954852 [email protected]
