TEI Final Presentation March 27 2013 (2) - Detroit Chapterteidetroitchapter.camp7.org/Resources/Documents/TEI Final... · • The specific rules for market -based sourcing can vary

TEI PresentationhMarch 27, 2013

Sourcing of Sales other than Tangible Personal Property

TEI Presentation – March 2013Page 2

Sales Apportionment Sourcing Trends: Market Sales Apportionment Sourcing Trends: Market verses Cost of Performance – The New Approach

• A major trend in state corporate income taxes is the adoption of market-b d l f i l f i i li f h di i l U if based rules for sourcing sales of services in lieu of the traditional Uniform Division of Income for Tax Purposes Act (UDITPA) cost-of-performance rule.

• Under UDITPA, for purposes of computing the sales factor, sales of services are assigned to the state in which the income-producing activity is performed. If the corporation performs the income-producing activity in two or more states, the sale is assigned to the state in which the corporation performs a greater proportion of the income-producing activity than in any other state, based on the costs of performance.

• Under a market-based approach, sales of services are assigned to the Under a market based approach, sales of services are assigned to the state in which the services or benefits of the services are received or delivered, or where the customer or marketplace is located.

• The specific rules for market-based sourcing can vary widely from state to • The specific rules for market-based sourcing can vary widely from state to state and, within a particular state, may vary by industry.

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Market-Based Sourcing States (as of Oct. 18, 2012)•Alabama Code §40-27-1(IV)(17); eff. 2011.•Alabama Code §40-27-1(IV)(17); eff. 2011.Alabama

•Az Rev. Stat. § 43-1147(B); eff. 2014- 5 year binding election phased in as follows: 2014- 85%; 2015- 90%; 2016-95%; 2017-100%.

•Az Rev. Stat. § 43-1147(B); eff. 2014- 5 year binding election phased in as follows: 2014- 85%; 2015- 90%; 2016-95%; 2017-100%. Arizona (elective; eff. 2014)

•Cal. Rev. & Tax. Code §25136; For taxpayers electing single-sales factor apportionment eff. 2011. & 2012; mandatory for all taxpayers eff. 1/1/2013.

•Cal. Rev. & Tax. Code §25136; For taxpayers electing single-sales factor apportionment eff. 2011. & 2012; mandatory for all taxpayers eff. 1/1/2013.

California (elective for 2011 & 2012; mandatory 1/1/2013)

•Ga. Code Ann. §48-7-31(d)(2)(A)(i).•Ga. Code Ann. §48-7-31(d)(2)(A)(i).Georgia

•35 ILCS 5/304(a)(3)(C-5)(iv); eff. 2009.•35 ILCS 5/304(a)(3)(C-5)(iv); eff. 2009.Illinois

•Iowa Admin. Code Reg. § 701-54.6(1).•Iowa Admin. Code Reg. § 701-54.6(1).Iowa

•Me. Rev. Stat. Ann. tit. 36, §5211(16-A)(A); eff. 2007.•Me. Rev. Stat. Ann. tit. 36, §5211(16-A)(A); eff. 2007.Maine

•Md. Reg. §03.04.03.08(C)(3)(c)—applies to services only (other income is sourced based on ave. in-state prop/payroll factors).

•Md. Reg. §03.04.03.08(C)(3)(c)—applies to services only (other income is sourced based on ave. in-state prop/payroll factors).Maryland

•Mich. Comp. Laws §206.665(1)(e) & (2); eff. 2012 (eff. 2008 for MBT).•Mich. Comp. Laws §206.665(1)(e) & (2); eff. 2012 (eff. 2008 for MBT).Michigan

•Minn. Stat. § 290.191(5)(h)-(j), eff. 1987.•Minn. Stat. § 290.191(5)(h)-(j), eff. 1987.Minnesota

•Neb. Rev. Stat. §77-2734.14(3); eff. 2014•Neb. Rev. Stat. §77-2734.14(3); eff. 2014Nebraska (eff. 2014)

•Ohio Rev. Code Ann. §5733.05(B)(2)(c)(ii), eff. 2004.•Ohio Rev. Code Ann. §5733.05(B)(2)(c)(ii), eff. 2004.Ohio

•Okla. Admin. Code §710:50-17-71(1)(A)(ii) – applies to services ( other income not included in factor); eff. 2010.

•Okla. Admin. Code §710:50-17-71(1)(A)(ii) – applies to services ( other income not included in factor); eff. 2010.Oklahoma

•Utah Code Ann. §59-7-319(3) & (4), eff. 2009.•Utah Code Ann. §59-7-319(3) & (4), eff. 2009.Utah

•Wash. Rev. Code Section 82.04.462 and Wash. Admin. Code Section 458-20-19402(5)(a)(i), eff. June 1, 2010.

•Wash. Rev. Code Section 82.04.462 and Wash. Admin. Code Section 458-20-19402(5)(a)(i), eff. June 1, 2010.Washington

•Wis. Stat. § 71.25(9), eff. 2009 for intangible receipts; eff. 2005 for service receipts.

•Wis. Stat. § 71.25(9), eff. 2009 for intangible receipts; eff. 2005 for service receipts.Wisconsin4

Market Based Sales Sourcing Proposals – The New Market Based Sales Sourcing Proposals The New Approach

• Kentucky

• Massachusetts

• Minnesota

• Oregon

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Market-Based SourcingCOP – Proportionate [pro rata % of activity in state]

Sales Factor Sourcing Methods (as of Oct. 18, 2012)

WA

COP – Plurality[If the greater percentage of costs of performance occurs in that state (does not have to have a majority of costs, just more costs than any other single state)– 100% of revenue is reported in the sales factor of that state.]

( , )

ME

VTNHMANY

CTMIWI

MN

ND

SDWY

MT

WA

OR

ID

CARI

PA

DE

VAWV

ILOHIN

KYMOKS

IANE (Plurality; Market eff. 2014)

COUT

WY

NV

Market if elect if Single Sales Factor eff. 2011 &

2012; mandatory

2013

MD

NJ

DC

AK

NC

SC

GA

TN

ALMS

AR

TX

OKNM

AZ (Plurality; Market –5 yr binding election eff. 2014)

FL

LATX

HI

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Cost of Performance Sourcing - Still Alive and Kickin' Cost of Performance Sourcing Still Alive and Kickin

UDITPA §17 states the following with respect to sales other than of tangible personal property:p p p y

Sales, other than sales of tangible personal property, are in this state if:(a) the income-producing activity is performed in this state; or(b) the income-producing activity is performed both in and outside this state ( ) p g y p f

and a greater proportion of the income-producing activity is performed in this state than in any other state, based on costs of performance.

• Unlike sales of tangible property which are generally sourced based on the • Unlike sales of tangible property, which are generally sourced based on the destination of the property, under the cost of performance method, sales of non-tangible items are sourced to the state in which the greatest proportion of costs are incurred, where the majority (>50%) of costs are incurred, or on a pro-

b irata basis.• Often results in an "all or nothing" sales factor allocation All-or-nothing plurality approach

All d h f d All receipts sourced to state where majority of costs incurred

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EXAMPLE

• 30% of costs in State A• 30% in State B• 40% in State C All receipts go to State C under UDITPA Sect. 17/plurality

approachpp Receipts sourced nowhere under majority approach Receipts sourced proportionately under proportionate approach

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Q&A to show double sourcing if in both COP & market sourcing states under certain circumstances

FACTS:

Seller’s commercial domicile: Virginia Files tax returns in Virginia, Georgia and Pennsylvania Customer location: Georgia

QUESTION Wh f i d i h l f ?

Percentage of costs incurred in performing the service:40% Virginia30% Georgia30% Pennsylvania

QUESTION: What percentage of revenue is reported in the sales factor numerator?[Assume all service benefits are received at the customer’s location]

(1) Virginia (all-or-nothing approach)(2) Pennsylvania (all-or nothing approach)(3) Georgia (where benefit of the service is received)(3) Georgia (where benefit of the service is received)

ANSWER:1) VIRGINIA: 100%

The greater proportion of the income-producing activity is performed in Virginia than in any one other state, based on cost of performance.

2) PENNSYLVANIA 0%2) PENNSYLVANIA: 0% The greater proportion of the income-producing activity is performed in Virginia, NOT Pennsylvania, than in

any one other state, based on cost of performance.3) GEORGIA: 100%

The benefit of the service occurs in Georgia.

Therefore 200% of sales of services are apportioned, not 100%.

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Q&A to show nowhere sales sourcing could work if in both COP & market sourcing states under certain circumstances

FACTS:

Seller’s commercial domicile: Georgia Files tax returns in Virginia, Georgia and Pennsylvania Customer location: Virginia Customer location: Virginia Percentage of costs incurred in performing the service:

30% Virginia40% Georgia30% Pennsylvania

QUESTION: What percentage of revenue is reported in the sales factor numerator?[Assume all service benefits are received at the customer’s location]

(1) Virginia (all-or-nothing approach)(2) Pennsylvania (all-or nothing approach)(3) Georgia (where benefit of the service is received)

ANSWER:(1) VIRGINIA: 0%

The greater proportion of the income-producing activity is performed in Georgia, not Virginia, because 40% of the costs are incurred in Georgia and only 30% are incurred in Virginia.g y g

(2) PENNSYLVANIA: 0% The greater proportion of the income-producing activity is performed in Georgia, NOT Pennsylvania,

because 40% of the costs are incurred in Georgia and only 30% are incurred in Pennsylvania.(3) GEORGIA: 0%-

The benefit of the service occurs in Virginia NOT Georgia The benefit of the service occurs in Virginia, NOT Georgia.

Therefore NO sales of services are apportioned, not 100%. Also known as “nowhere sales.”

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• What is “income producing activity”? States have not taken a uniform approachuniform approach.

• What costs are included when determining where costs incurred?• States may aggressively interpret their existing cost of performance

statutes, particularly when they find themselves on the “nothing” side. Bellsouth Advertising & Publishing Corp. v. Chumley, 308 S.W.3d 350

(T Ct A 2009)(Tenn. Ct. App. 2009).o BellSouth sourced zero receipts to Tennessee under state’s all or

nothing, majority cost of performance approach to sourcing service receiptsreceipts.

o DOR invoked alternative apportionment rules and sought to use market sourcing.

o State court agreed even though there was nothing extraordinary o State court agreed, even though there was nothing extraordinary about the taxpayer’s fact pattern that would require extraordinary relief.

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Cost of Performance Sourcing - Still Alive and Kickin' Cost of Performance Sourcing Still Alive and Kickin AT&T Cases (Massachusetts v. Oregon 2011)

Two state cases involving same taxpayer and same fact pattern:Two state cases involving same taxpayer and same fact pattern:

• Taxpayer provided interstate and international calling services.• At issue was how closely can you slice “direct costs” and “income y y

producing activity.”

Massachusetts Board of Tax Appeals adopted a broader “operational” approach.

Oregon Tax Court adopted a stricter transactional approach (on a call-by-call basis).

• Massachusetts Court ruled that third-party costs (access fees paid to LEOC) not included.

• Oregon court reached opposite result.

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Lingering Michigan SBT (COP) Sales Sourcing IssuesLingering Michigan SBT (COP) Sales Sourcing Issues

• Goods vs Services• Goods vs. Services

HOV Services v Treasury, MTT Docket No. 384364 , (3/19/12), Ct. of Appeals Docket No. 309575 (pending before COA)

Midwest Bus Corp v Dep’t of Transportation, 288 Mich App 334 (2010) Michigan Production Machining, Inc v Dep’t of Treasury, MTT Dk No 409641,

August 18, 2012 PFG E t i D ’t f T COA Dk N 305948 (D b 27 PFG Enterprises v Dep’t of Treasury, COA Dk No 305948 (December 27,

2012)

• Sourcing of Services – Cost of Performance

Lason Systems, Inc v Dep’t of Treasury, COA Dk No 300267 (January 26, 2012)

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Market Based Sourcing – The New ApproachMarket Based Sourcing The New Approach

Typically based on one of following:

Location of customer Where benefit of service is derived Where intangible personal property is utilized

Elements:

Where is customer situated (billing address, commercial domicile or other)?

Where is benefit derived (what if multiple states)? Where is benefit derived (what if multiple states)? Ability to “look through” to customer’s customers (e.g., sale of

fulfillment services to national telecom company)A il bilit f “l k th h” i f ti b li it d Availability of “look-through” information may be limited

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Problem areas:• Difficulty defining termsDifficulty defining terms

Where is a customer located (its billing address, its headquarters, or place where service is received)?

Where is benefit received? Typically the person with superior information is Where is benefit received? Typically, the person with superior information is the buyer of the service, not the seller; and buyer may not wish to share such information

“Look-through” sourcing makes sense, but such information is not always oo t oug sou c g a es se se, but suc o at o s ot always available

• May result in economic nexus, especially in light of states adopting “factor presence” nexus standards

• Primarily benefits in-state companies and shifts tax burden to out-of-state companies (flip side of this is that market sourcing is an economic development tool, especially with no throwback)

• Risk of double-taxation due to non-uniform administration

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Planning Opportunities:

• Situate service centers in market-sourcing state

Minimizes costs in states applying cost-of-performance rule

No effect in market-sourcing state

• Closely evaluate differences among states’ market-sourcing rules

Proportionate or all-or-nothing approach?

Does state use tiered/cascading sourcing rules e g billing address as proxy Does state use tiered/cascading sourcing rules, e.g. billing address as proxy for location of customer?

Does the state provide a “safe-harbor” rule for sourcing of receipts from services?

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Alabama• Effective 2011• Sales other than tangible personal property are sourced to Alabama

if the taxpayer’s market for the sale is Alabamaif the taxpayer s market for the sale is Alabama• Services: Delivered to Alabama location• Intangible license: Property used in Alabama

f l d b d h b h h• If a sale is assigned based on the above to a state where the taxpayer is not subject to tax, then the sale is excluded from the sales factor

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ArizonaArizona• 5-year binding election available for “multistate service providers”

A multi-state service provider is one that derives more than 85% of its sales from services provided to purchasers who receive the benefit of sales from services provided to purchasers who receive the benefit of the service outside AZ, and includes all taxpayers required to file a combined report and all members of an affiliated group included in a consolidated return

• Phased in 2014-2017 2014 – 85% market sales; 15% income-producing activity sales 2015 – 90% market sales; 10% income-producing activity sales 2016 – 95% market sales; 5% income-producing activity sales 2017 – 100% market sales

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California California Historic law

• 3 factor apportionment formula with double weighted sales factor• 3-factor apportionment formula with double-weighted sales factor• Cost-of-performance (preponderance) sourcing for sales of other than

tangible personal propertyJ h t l l ti th bi d l f t t• Joyce approach to calculating the combined sales factor numerator

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California California Single – Sales Factor

• For tax years beginning on or after Jan. 1, 2011 and before Dec. 31, 2012 C lif i t th t l t t i l f t l 2012, California taxpayers that elect to use a single-factor sales apportionment formula must use a market-based rule to source sales of services. T th t d t k th l ti t ti t th UDITPA Taxpayers that do not make the election must continue to use the UDITPA

cost-of-performance rule to source sales of services. Under the market-based sourcing rule, sales of services are assigned to California “to the extent the purchaser of the service received the benefit of the service in this state.”p

Election not binding – can pick a different election each year Election must be made on an original, timely filed return

• For tax years beginning on or after Jan. 1, 2013, California taxpayers For tax years beginning on or after Jan. 1, 2013, California taxpayers are required to use single-factor sales apportionment and market-based sourcing

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CaliforniaCalifornia

• In March 2012, the California Franchise Tax Board published regulations that provide guidance for applying the new market-based rule. The p g pp y gregulations apply retroactively to tax years beginning on or after Jan. 1, 2011. The guidance varies, depending on whether the customer is an individual or a business entity.

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CaliforniaCalifornia•If the customer is an individual: If the customer is an individual, it is presumed that the benefit of the service is

received at the customer’s billing address, and the Franchise Tax Board will accept g , pthis method of assigning the sales to California. The taxpayer may overcome this presumption by showing, by a preponderance of the evidence, that its contract with the customer or its other books and records provide the location where the benefit of the service is received.

If the taxpayer overcomes the presumption, but the taxpayer cannot derive an alternative method by reference to the contract or its books and records, then the location where the benefit of the service is received is “reasonably approximated.” The term “reasonably approximated” means that, considering all sources of The term reasonably approximated means that, considering all sources of information other than the contract and the taxpayer’s books and records, the location of the market for the benefit of the service is determined in a manner that is consistent with the activities of the customer. Information, including publicly available information, such as population, that is specific in nature is preferred over available information, such as population, that is specific in nature is preferred over information that is general in nature. If population is a reasonable approximation, the population used is based on the most recent U.S. census data.

22


CaliforniaCalifornia• If the customer is a business entity: If the customer is a corporation or other business entity, it is presumed that the

benefit of the service is received at the location (or locations) indicated by the ( ) ytaxpayer’s contract with the customer or the taxpayer’s other books and records, notwithstanding the customer’s billing address.

The taxpayer or the Franchise Tax Board may overcome this presumption by showing, by a preponderance of the evidence, that the location indicated by the showing, by a preponderance of the evidence, that the location indicated by the contract or other books and records is not the actual location where the service’s benefit is received. If neither the contract nor the other books and records indicate where the benefit of the service is received, or if the presumption is overcome, then the location should be reasonably approximated. If the location cannot be the location should be reasonably approximated. If the location cannot be reasonably approximated, then it is presumed that the service’s benefit is received at the location from which the customer placed the order for the service. If the location from which the customer ordered the service cannot be determined, then the benefit of the service is received at the customer’s billing address.the benefit of the service is received at the customer s billing address.

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GeorgiaGeorgia• Gross receipts are assigned to Georgia “if the receipts are derived from

customers within this state or if the receipts are otherwise attributable to this state’s marketplace.” to this state s marketplace. The term “customers within this state” means a customer that is engaged in a trade

or business and maintains a regular place of business within Georgia, or a customer that is not engaged in a trade or business whose billing address is in Georgia. A “regular place of business” means an office factory warehouse or other business regular place of business means an office, factory, warehouse, or other business location at which the customer regularly conducts business. A “billing address” means the location indicated in the books and records of the taxpayer as the address of record where any statement or bill relating to a customer’s account is mailed.

• If a customer receives only a portion of the benefit of the service in Georgia, the gross receipts are assigned to Georgia in proportion to the extent the customer benefits from the service in Georgia.

24


IllinoisIllinois• Adopted market-sourcing effective 2009:

35 ILCS § 5/304, 304(a)(3)(C-5)(iv) 35 ILCS § 5/304, 304(a)(3)(C 5)(iv) Services sourced to state where services received, using tiered

souring rules Sales “thrown out” if taxpayer not taxable in state where services Sales thrown out if taxpayer not taxable in state where services

received

25


IowaIowa• Gross receipts are included in the numerator of the Iowa sales factor

“in the proportion which the recipient of the service receives benefit f th i i thi t t ” Th if th t i ll f th of the service in this state.” Thus, if the customer receives all of the

benefit of the service in Iowa for a specific contract or an item of income, all of the gross receipts are assigned to Iowa. On the other hand if the customer receives only a portion of the benefit of the hand, if the customer receives only a portion of the benefit of the service in Iowa, the gross receipts are assigned to Iowa in proportion to the extent the customer receives the benefit of the service in Iowa. Iowa.

• If the taxpayer does not believe that this method of apportionment “reasonably attributes” income to business activities within Iowa, it may request the use of an alternative method of apportionmentmay request the use of an alternative method of apportionment.

26


OklahomaOklahoma• Adopted market-sourcing by regulation effective July 11, 2010 Okla. Admin. Code § 710:50-17-71 Services sourced to Oklahoma if:

o Receipts are derived from customers within Oklahoma, oro Customers are within the state if customer maintains a regular o Customers are within the state if customer maintains a regular

place of business in Oklahoma, or billing address is in the Stateo Receipts are otherwise attributable to the Oklahoma marketplace

27


MaineMaine• Adopted market-sourcing effective 2007

Me. Rev. Stat. Ann. tit. 36, § 5211(16-A)(A); 18-125 Code Me. R. ( )( )801

Services sourced to state where services received, using tiered sourcing rules

Sales to federal government sourced under COP rules

28


MarylandMaryland• Gross receipts from contracting or service-related activities are included in

the numerator of the Maryland sales factor if the receipts are “derived from customers within this State ” customers within this State.

• An individual or business enterprise is a customer “within this State” if the individual or business enterprise is domiciled in Maryland. In the case of a business enterprise, the domicile is the state in which the office or place of p , pbusiness that provides the “principal impetus for the sale” is located.

• If an office or place of business cannot be identified as providing the principal impetus for the sale, then the business enterprise is domiciled in the state in which the headquarters or principal place of management of the business enterprise is located.

• Under a special rule, if the service relates to the construction or i f l h h d i i f h h h improvement of real property, then the determination of whether the customer is within Maryland is based on the property’s situs.

29


MichiganMichigan• Receipts from the performance of services are included in the numerator of the

Michigan sales factor if the recipient of the services receives the “benefit of the services in this state ” If the recipient of the services receives only a portion of services in this state. If the recipient of the services receives only a portion of the benefit in Michigan, the sale is assigned to Michigan in proportion to the extent that the recipient receives the benefit of the services in Michigan. If it cannot be determined where the benefit to the customer is received, the sale is

d b d h ’ billi ddsourced based on the customer’s billing address.• The method the taxpayer uses to determine the extent of the benefit received in

Michigan must be reasonable in light of all the facts and circumstances and must be uniformly and consistently applied Furthermore a taxpayer may not simply be uniformly and consistently applied. Furthermore, a taxpayer may not simply use the customer’s location to source a sale of services without first making a reasonable effort, based on its books and records, to determine where the benefit of the service is received.

• RAB 2010 – 5 sheds some light on how market sourcing is interpreted under the MBT.30


MinnesotaMinnesota• Receipts from the performance of services are assigned to Minnesota if

the “services are received” in Minnesota.• If the customer is a corporation, partnership, or trust, the sale may be

assigned only to a state where the customer has a fixed place of doing business.

• If the state where the services are received is not readily determinable or is a state where the corporation, partnership, or trust receiving the service does not have a fixed place of doing business, the services are d d b i d h ffi f h f hi h h deemed to be received at the office of the customer from which the services were ordered in the regular course of the customer’s trade or business. If the ordering office cannot be determined, the services are deemed to be received at the office of the customer to which the deemed to be received at the office of the customer to which the services are billed.31


NebraskaNebraska• For tax years beginning on or after 1/1/14, Nebraska adopts a market

base approach to source most types of services.• Services are sourced to Nebraska if the sales are derived from a

Nebraska buyer.• If service relates to property, look to the location of the property.• If service provided to an individual, look to the location of the

individual. • Application services (SaaS, PaaS, IaaS) sourced to the buyer’s use pp ( , , ) y

location of the services.• Catch all rule for services not addressed in the statute.• Communications companies still use COPCommunications companies still use COP.

32


UtahUtah• Adopted market-sourcing effective 2009 (Regulation issued December

2011) Utah Code Ann. § 59-7-319(3) Services sourced to state where customer receives the greatest

benefit of the service (all-or-nothing rule)f f ( g ) Income in connection with real or intangible personal property

sourced to the state if the real or intangible personal property is in Utah

33


WisconsinWisconsin• Adopted market-sourcing for intangible receipts effective 2009; for

service receipts effective 2005

Wis. Stat. 71.25(9)(dh); Wis. Admin. Code 2.39(6)(f)

Services sourced to state where benefit is received

50% f l th b k t Wi i if t t bj t t 50% of sales thrown back to Wisconsin if taxpayer not subject to tax in state where receipts are sourced, and taxpayer is commercially domiciled in Wisconsin

34


Ohio (CAT)Ohio (CAT)• Adopted market-sourcing effective 2009

Ohio Rev. Code Ann. § 5751.033(I)( ) Service receipts sourced to Ohio if “sitused to Ohio,” that is to

the extent the recipient receives the benefit in the state.o “Gross receipts shall be sitused to this state in the o Gross receipts . . . shall be sitused to this state in the

proportion that the purchaser’s benefit in this state with respect to what was purchased bears to the purchaser’s benefit everywhere with respect to what was purchased.”y p p

o Physical location where purchaser uses or receives the service is paramount.

35


Ohio (CAT) (cont )Ohio (CAT) (cont.) Service receipts sourced to Ohio if “sitused to Ohio,” that is to the

extent the recipient receives the benefit in the state. (cont.)If th t l ti i l t lt ti o If that location is unclear, taxpayer may use an alternative method so long as it is reasonable, uniformly supplied, and supported by taxpayer records (even if rejected, taxpayer protected from penalty if adopted in good faith).protected from penalty if adopted in good faith).

o Generally, all receipts sourced to Ohio if purchaser is “only located in Ohio;” divided if purchaser uses in more than one location.

Ohio Admin. Code § 5703-29-17 provides rules for 54 listed services o Specific rules for 54 listed services include advertising, call

center, computer programming, data processing, financial , p p g g, p g,management, web hosting, market research and telecom, among others.

36


Washington (B&O)Ad d k i ff i J 1 2010• Adopted market-sourcing effective June 1, 2010 Wash. Rev. Code Section 82.04.462 and Wash. Admin. Code Section 458-20-

19402(5)(a)(i) B&O tax applies to “apportionable activities” that are measured by gross B&O tax applies to apportionable activities that are measured by gross

income and subject to single-factor apportionment. “Apportionable income” is income earned from engaging in specified

activities, including most services. Numerator of receipts factor is the income from the apportionable activity

attributable to Washington, under W.R.C. 82.04.462(3)(b):o Where the customer received the benefit of the service.

If customer received the benefit in more than one state then income is o If customer received the benefit in more than one state, then income is attributable to the state in which the benefit of the service was “primarily received.” (>50% under Wash Admin. Code Sec. 458-20-19403).

o If neither can be determined, then a series of default rules apply. Services sourced to state where services received, using tiered

sourcing rules.37

Sales Tax in the Cloud


History of Computer SoftwareHistory of Computer Software

• Mainframes – Centralized management; secure, limited access; higher g ; , ; gcost

• Client/Server – Costly to deploy and manage; added flexibility

• Web – Simple to deploy and manage; broad access

• Cloud – Maximum efficiency with optimized resource utilization; very flexible; on-demand self-service; broad network accessflexible; on demand self service; broad network access

39

Service Models of Cloud ComputingService Models of Cloud Computing

• Software as a Service (SaaS) – consumer uses provider’s applications running on a cloud infrastructure. Applications can be accessed from various client devices through a think client interface such as a web-based e-mail. The consumer does not manage the IT behind the scenes and has no control. Used by individuals and businesses as a low cost alternative to traditional software.

• Platform as a Service (PaaS) – Consumer may access the cloud infrastructure through created or acquired applications created using programming languages and tools supported by the provider. The consumer has control over the deployed applications and possibly application hosting environment deployed applications and possibly application hosting environment configurations. Used by programmers, developers, and web designers.

• Infrastructure as a Service (IaaS) – Consumer is able to obtain processing, storage, networks, and other fundamental computing resources and can run a storage, networks, and other fundamental computing resources and can run a range of software. The consumer does not manage/control the underlying cloud infrastructure but does control the operating systems, storage and deployed applications. Used by businesses that want complete control.

40

Cloud Computing Sales Tax NexusCloud Computing - Sales Tax Nexus

Nexus standards: How much presence is enough? : p g

• Physical presence test (Quill) decision in question: affiliate, click-through, agency nexus laws

• If SaaS is prewritten/canned software, is it tangible personal property that creates a taxable presence?

Will h ti b it t l t • Will hosting a website on a server create sales tax nexus for a taxpayer?

41

Cloud Computing Sales Tax

Characterization of transactions is important for state sales tax

Cloud Computing - Sales Tax

pdeterminations—is this a sale, lease, license to use or a service?

• Transfer of TPP? TPP = “Personal property that can be seen weighed measured felt TPP = Personal property that can be seen, weighed, measured, felt,

or touched or that is in any other manner perceptible to the senses”

• Michigan’s Sales Tax Act defines “tangible personal property” to mean personal property that can be seen, weighed, measured, felt, or touched or personal property that can be seen, weighed, measured, felt, or touched or that is in any other manner perceptible to the senses and includes electricity, water, gas, steam, and prewritten computer software under MCL 205.51a

• The passage of S.B. 0143 would provide that prewritten computer software does not include granting the right to use prewritten software installed on another person’s server in the Sales Tax Act. S.B. 0142 is the complimentary Use Tax bill Use Tax bill.

42


Transfer of TPP?


• Sales of software may be subject to sales tax if conveyed in tangible medium. TPP even if conveyed electronically since it is composed of electrons that have a physical existence and can be perceived by the senses.

• Not a sale of software since no transfer or delivery No download of digital code or product U f th th titl t f Usage fees rather than title transfer

• Lease

• License to use

• Not taxable because server is not in-state

43


Taxable service?


• User’s objective may be very difficult to ascertain Use of the software Obtain information serviceObta o at o se v ce

o Information service (NY)o Data processing service (TX, OH)o Digital automated service (WA)g ( )o Computer related service (CT)o Communication service (FL, SC)o Not an enumerated taxable service

44


If taxable, to which state should the transaction be sourced for sales tax


,purposes?

• No delivery, so no destination state?• If sourcing is based on use, which is the state of use?

Location of customer/user Location of the software/server Conflict with sourcing between states that source SaaS sales based

upon location of customer vs. location of server upon location of customer vs. location of server • If sourced by use and location of customer

How do we determine where user is and where use by customer occurs?

L ti f th Wh t if lti l i l d?o Location of the server: What if multiple servers are involved?o Seller location: Where application is developed and maintained?o Customer billing addresso User location: Allocation of contracts/licenses for users in

multiple locations?

45


Data Processing ServicesT


Texas

“The processing of information for the purpose of compiling and producing records of transactions, maintaining information, and entering and retrieving information.”

• Texas PLR 200805095L (May 2008): • Texas PLR 200805095L (May, 2008): Taxpayer provided online business application where its customers entered their business information into the

software via the internet. Allowed the customer to conduct various activities including managing inventory, record sales, process payroll,

etc. T i i i did id d i i f d d i i i i Taxpayer position – it did not provide data processing; its customers performed any data processing activities Comptroller held that taxpayer provided data processing; taxpayer’s computer processed the information entered

by customers and made calculations to prepare a tax return (along with additional activities)

• Policy Letter Ruling No. 201004665L (Apr. 29, 2010): Medical transcription services that used a “software as a service” or SaaS cloud platform to perform and deliver Medical transcription services that used a software as a service or SaaS cloud platform to perform and deliver

those services. Constitute taxable data processing services.

Ohio

“Automatic data processing” means processing of others’ data, including keypunching or similar data entry services together with verification thereof or providing access to computer equipment for the purpose of processing datatogether with verification thereof, or providing access to computer equipment for the purpose of processing data.

46

Sales Tax in the CloudInformation Services

New York


“The collecting, compiling or analyzing information of any kind or nature and the furnishing reports thereof to other persons is an information service.”

The furnishing of information that is personal or individual in nature and that is not or may not be substantially incorporated in reports furnished to other persons is not a or may not be substantially incorporated in reports furnished to other persons is not a taxable information service

• TSB-M-10(7)S (July, 2010) Intended to “clarify” tax treatment of certain information services

o Key factor is the “primary function” of the serviceo Key factor is the primary function of the serviceo Lists a number of services that are considered “information services”o Revises previous positions on taxability of certain services

• DZ Bank (May, 2009) Web-based service that offered credit information of thousands of publicly held companies Service determined to be a taxable information service and not an electronic financial consulting Service determined to be a taxable information service, and not an electronic financial consulting

service

• TSB-A-09(18) (April, 2009) A web-based subscription service for on-line evaluation reports of broker-dealers is a taxable information

service because a common database was used

47

Sales Tax in the CloudCloud Computing/ASP/SaaS

Hardware and software resources made available on the


Hardware and software resources made available on the Internet & managed third party services.

May be referred to as Application Service Provider (ASP), Software as a Service (SaaS), or Cloud Computing

• Software housed and accessed remotely

• No downloads or delivery

• User may install temporary “applet” on y p y ppcomputer/server

• State may treat transaction as sale/license of electronically delivered software

• Provision of computer services (e g data • Provision of computer services (e.g., data processing, information services)

• Specific tax treatment of ASP/SaaS transaction (e.g., CO, NC, TX, WA)

48


Examples:


On-line learning and education

On-line health and medical advice

Social Networking websites

Transferring funds between banks

Salesforce.com – CRM software

Web-based e-mail

G l W ll b ti l k d ’ t ti Google Wave - collaboratively work on same doc’s at same time

Virtual IT - EC2 – online servers

Apple MobileMe – online network storage

Amazon Elastic Computer Cloud Synchronization back up and utility computing Amazon Elastic Computer Cloud – Synchronization, back-up, and utility computing

49


ASP/SaaS Services


• Taxpayer’s Position:

Software used in ASP’s server may be canned software but:

o Customer has no control over ASP’s softwareo Customer has mere right to use, rather than a

lease/license

• State’s Position:

S ft d i ASP’ i d ft Software used in ASP’s server is canned software

Customer exercises dominion and control over ASP’s software

By exercising dominion and control over ASP’s software, customer is effectively using, pursuant to a license, that software

Customer is thus taxable using TPP at customer’s location

50


Cloud Computing/ASP/SaaS


Colorado Letter Ruling PLR-11-007 (Dec. 20, 2011): Ruling on Web-based IT solution• Fees related to Web-based file transfer and tracking solution are not subject to

sales or use tax• Similar to Google email services

E f th t ti N t th li f ft f h d b t • Essence of the transaction: Not the license of software or use of hardware but obtaining a nontaxable service

• Rental of hardware: Customer did not have sufficient degree of control, e.g., seller retained custody of servers seller retained custody of servers

51




Iowa Dept of Rev. Policy Letter 12300002 (Jan. 11, 2012): Hosted software and training• Hosted software and training fees are not subject to Iowa sales or use tax• Cited the National Institute for Standards and Technology’s definition of cloud

computingN t d th t ft i d l d d d li d t t • Noted that no software is downloaded or delivered to customers; title/possession to not transferred

• Fees meet definition of cloud computing services• No statutory Iowa authority to tax such services• No statutory Iowa authority to tax such services

52




Florida - TAA 10A-051, 12/06/2010

Sales of online authentication services to customers via the provision of a digital certificate (which allow d i h h h i i d d i h ’ b i ) blan end user to recognize that he or she is indeed accessing the customers’ website) are not taxable.

TAA 11A-021, 7/23/2011

The sale of office management software available for download through an internet connection is not the sale of the use of tangible personal property since downloaded electronically.

Kansas - Kansas Opinion Letter No. O-2010-005, 06/22/2010

Fees charged by an ASP provider to its customers for ASP services are not subject to sales tax. Such fees include recurring monthly charges, set-up fees, support fees, training fees, data migration fees, and forms programming fees. However, the sale of canned software that can be used independent of the ASP service is subject to sales tax.

53

Sales Tax in the CloudSales Tax in the Cloud


Massachusetts - Letter Ruling No. 11-4 (Apr. 12, 2011)

• Sale, license and right to use software on a server hosted by the taxpayer or a third party are taxable.

• When there is no charge for the use of the software and the object of the transaction is acquiring a good or service other than the use of the software, sales tax doesn’t apply.

• Taxpayer provided information services to its customers based on data from prospective employees d th id thi i f ti t it t i t and then provides this information to its customers in a report.

• The object of the transaction was the database access, including reports prepared by the taxpayer, rather than use of the software; therefore the transaction was a nontaxable sale of services.

• Subsequent Rulings include Letter Ruling No 12 11 (9/25/2012) and Letter Ruling No 12 8 (7/16/12)• Subsequent Rulings include Letter Ruling No. 12-11 (9/25/2012) and Letter Ruling No. 12-8 (7/16/12)

54




Missouri – Letter Ruling No. LR 5753 (7/16/2009)Sale of Software hosted on a server outside of the state is not subject to Missouri sales tax because the software was not transferred by a tangible medium.

Minnesota – No specific guidance issued yetCloud computing not subject to sales tax regardless of server location - considered an information service.• Hosted on service provider’s server.• Customer only has remote access to software.Customer only has remote access to software.• Customer’s use of the software is for processing only.• Charges for maintenance and support are also not taxable.

New York - TSB-A-11(17)S (June 6, 2011)( ) ( )

Hosted marketing service that provides marketing services to clients that use e-mail, direct mail and other marketing channels to reach their customer is subject to sales and use tax as the sale of prewritten software. • Taxpayer licenses to clients the right to use the software housed on the taxpayer’s servers for the p y g p y

purpose of marketing campaigns.• Taxpayer’s charges for optional training and consulting services were not taxable.

55




New York (Cont.)

On Demand ASP Software (TSB-A-08(62)S):

• License to use of out-of-state ASP software is taxable even absent delivery of the software to the yuser. Software is deemed to be constructively received in New York.

• Involved a software product that allowed a customer to upload an image onto the petitioner’s servers and manipulate the image to show various colors and views (for example, a clothing item –front, back). Software resides on servers located outside New York.

National Football League ((TSB-A-09(37)S), Aug. 25, 2009):

• Use of out-of-state payroll processing service is taxable absent delivery of software because the software is deemed to be constructively received in New York.

• Software product allowed customer to upload payroll data to a server in Michigan. Thus customer used the software.

• The location of the code is irrelevant because the software can be used even without a download. Service component nontaxable.

56




p g

Washington - Wash. Rev. Code 82.04.050(8)

• Imposes tax on the sale of a “digital automated service,” defined to mean “any service transferred electronically that uses one or more software applications.” y pp

• DAS is not software but includes one or more software applications in providing the service.

Examples include Photo sharing services, Car History Report services, Search Engines

• Effective July 26 2009 Remote Access Software (ASP and SaaS) is classified as a retail sale for • Effective July 26, 2009 Remote Access Software (ASP and SaaS) is classified as a retail sale for Business & Occupations Tax and is subject to sales and use tax since software is used to provide a service.

57

Sales Tax in the Cloud – Questions to Ask Yourself

1. Whether SaaS is taxable = “true object” of the transaction

Sales Tax in the Cloud Questions to Ask Yourself

2. How does my company market itself?

• Does it portray itself as a SaaS provider on websites, in brochures and in advertising?

3. Does my company merely collect or store a user’s data, or does it perform analysis, calculations or manipulations?

4. What language is contained in our sales agreements?

• Are those agreements called professional services contracts, subscription agreements, license agreements or something else entirely? g g y

5. Are my services separately itemized? Don’t want to bundle taxable and nontaxable services.

6. Is my service purely automated or is human intervention (i.e., transcribing user-provided data manually) essential to rendering the service?

• If so, is there a point where my service more closely resembles a nontaxable professional service (rather than a taxable service)?

58


IaaS/PaaS


While a significant number of states have addressed cloud services from a SaaS point of view, very few states have addressed tax classification from

S P S d ian IaaS or PaaS standpoint.

Very states have updated their statutes and regulations to address the use of this technology.

59


Electronically Downloaded Software


Previous general definition of tangible personal property:

• Tangible personal property includes personal property that may be seen, weighed, measured, felt or touched,


or which is in any other manner perceptible to the senses.

Revised general definition of tangible personal property:

• Tangible personal property includes personal property • Tangible personal property includes personal property that may be seen, weighed, measured, felt or touched, or which is in any other manner perceptible to the senses, regardless of the method of delivery, and includes prewritten computer software.

SST state required to enact language separate from • SST state required to enact language separate from tangible personal property definition in order to tax software.

60




Texas – Policy Letter Ruling No. 200105241L

Sales of software over the Internet are subject to sales tax if the software is downloaded to a location in Texas. No tax is due on sales of software downloaded to a location outsdie of Texas.

Pennsylvania - Dechert LLP v. Commonwealth of Pennsylvania, Pa., No. 12 MAP 2008 (7/20/2010)

C d ft tit t t gibl l t P h f li t d Canned software constitutes tangible personal property. Purchases of licenses to use canned software are, therefore, subject to Pennsylvania sales and use tax. The delivery method for the software does not determine the taxability, according to the PA Supreme Court.

61


What is a digital good?


Digital Goods – The iPod Revolution• Tangible Personal Property• Data Processing• Information Services• Telecommunications/Ancillary Services• Software

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 revenue source• SSTP definitions and rules

62

Sales Tax in the CloudSales Tax in the Cloud

Digital Goods Taxation

WA

ID

ME

CTMA

AK

MI

MN

MT

WYNY

ORND

NHVT

SDWI

CT

DECO

MDCA

KS

IA

IL

MI

MO

NC

VAWV

WY

PANV OH

RINJ

UTNE

TN

KY

INDC

AZ NM

LAAL

HI

AR

FL

GA

NC

SCOK

TXMS

TN

Digital Goods Digital Goods Taxed Digital Goods Taxed by

FL

Non‐Taxable by StatuteDOR Position or Case Law

63


Taxation of Digital Goods


Florida - TAA 11A-002 (1/13/2011)

• Sales transactions involving only digital transmissions via the Internet to a customer’s computer, without any other evidence of the transfer of something tangible, are not sales of TPP for sales/use without any other evidence of the transfer of something tangible, are not sales of TPP for sales/use tax purposes. Such sales instead constitute services that are not subject to sales and use tax. On the other hand, files transferred via a hard drive, CD, flash drive, or DVD are TPP and thus subject to sales/use tax.

Indiana - Commissioner’s Directive #41, (September 2011)

• Sales and use tax is imposed on “products transferred electronically” only if the products meet the definition of specified digital products, ancillary services, prewritten computer software, or telecommunication services. Previously, tax was based on whether products transferred telecommunication services. Previously, tax was based on whether products transferred electronically were taxable in their tangible forms.

64




Kentucky – (Sec. 139.010, 139.200)Imposes tax on the retail sale of “digital property,” regardless of the user rights granted by the seller, or whether the buyer is obligated to make continued payments as a condition of the sale.

“Digital property" means any of the following which is transferred electronically: (1) Digital audio works; (1) Digital audio works; (2)Digital books; (3) Finished artwork;(4)Digital photographs; (5) Periodicals;( )(6) Newspapers; (7) Magazines; (8) Video greeting cards;(9) Audio greeting cards; (10) Vid (10) Video games; (11) Electronic games; or (12) Any digital code related to this property.

New Jersey - N.J. Rev. Stat. §§ 54:32B-3, 54:32B-2(zz))

Effective May 1, 2011, “specified digital products” are taxable. Such products are defined as “an electronically transferreddigital audio-visual work, digital audio work, or digital book,” and includes digital code used to obtain a product.

65




New York - TSB-A-11(20)S, July 8, 2011

Electronic books sold by CA company not subject to sales tax Ruled e-books do not meet definition of TPP

Do not meet definition of information services

North Carolina - 2009 G.S. 105-164.4(a)(6b), eff. Jan. 1, 2010

Imposes sales and use tax on digital property which includes: Audio worksAudio works Audiovisual works Books, magazines, newspapers, other publications Photographs and greeting cards Does not apply to information services Does not apply to information services Do not include any software

66


California Other Judicial Proceedings


Nortel Networks, Inc. v. State Board of Equalization, Court of Appeal of California, Second District, No. BC341568(1/18/2011)*

The Court held that a license to use software to operate telephone switch hardware constitutes an exempt transfer of patent and copyright interests under the Technology Transfer Agreement. The exemption applied since the software is copyrighted, contains patented since the software is copyrighted, contains patented processes, and enables the user to copy the software and make and sell products embodying the patents and copyrights.

*CA State Board of Equalization issued a News Release 5/27/11, indicating the CA Regulations would be amended in support of this decision.

67

Federal Legislation

Federal legislation

Federal Legislation

Marketplace Fairness Act (S.B 1832); Marketplace Equity Act (H.B 3179) and Main Street Fairness Act (S.B 1452)

Gives states the authority to compel online and catalog retailers, no matter where they are located to collect sales tax at the time of the transaction.

Digital Goods and Services Tax Fairness Act ( S.B. 971/HB 1860)

Would prevent state and local governments from imposing “multiple and discriminatory” taxes on digital goods and services. The act prevents states and localities from taxing digital products differently than their tangible counterparts.

68

Michigan Legislation

Michigan Main Street Fairness Act (H.B. 4202 and 4203- Feb. 2013)

Michigan Legislation

• Includes affiliate nexus language with greater than $10,000 in gross receipts language

69

QUESTIONS?QUESTIONS?

70

Michigan Corporate Income Tax Update


CIT – High LevelCIT High Level

• Most taxpayers will no longer be subject to MBT, effective 1/1/121/1/12

• Definition of a “taxpayer”• Tax imposed just an income tax• Still have UBGs but may be different than under MBT Flow-through entities not included as members in CIT UBG Control by corporation, but may be determined through relationship with

flow-through entities Is a corporate parent necessary to have a UBG?

• Apportionmentpp Flow-through entity unitary with corporation or UBG has proportionate sales

included in combined unitary sales factor Non-unitary flow-through entity has distributive share amount apportioned

based on the entity’s individual sales apportionment formula as if entity was subject to CIT

72

Flow-Through TreatmentFlow Through TreatmentNew for 2012

What HAS changedWhat HAS changed• FTEs not subject to entity level tax• Withholding on corporate/FTE members of FTEs $200,000 threshold for withholding if corporate/FTE members

• FTEs no longer required to file an entity level return of income FTEs required to file Forms 4917 and 4918 to report FTW (not Forms 160

165)or 165)• Corporate member allowed to provide an exemption form to FTE so FTW not

done on its share of distributive income

What HASN’T changed• Withholding on NR individual shareholders of FTEs

73

IC – DISCsIC DISCsWhat is the Issue?

Is an IC DISC subject to CIT?• Is an IC-DISC subject to CIT? IC-DISC must be C corp, cannot be S corp Under CIT, a “corporation” is defined to be a person required or has elected

t fil C d th IRCto file as a C corp under the IRC “Business income” under CIT means FTI, as defined in IRC §63 (calculated as

if IRC §§168(k) and 199 not in effect), with adjustments Under IRC DISCs not subject to FIT (IRC §991) but must compute and report Under IRC, DISCs not subject to FIT (IRC §991), but must compute and report

federal taxable income on 1120-IC-DISC CIT defines FTI as that defined in IRC §63, with that as starting base of

“business income” base in CIT IC-DISC not one of the “exempt persons” defined in CIT (MCL 206.625)

• Treasury is aware of this issue and has confirmed their stance that IC-DISCs are taxable entities under CITthat IC DISCs are taxable entities under CIT

74

IC-DISCsIC DISCsMichigan Tax Impact

Under MBT most IC DISCs were likely included in a UBG (or • Under MBT, most IC-DISCs were likely included in a UBG (or should have been)

• Under CIT, the related supplier will not be a “person” so , pp pthe IC-DISC required to file a stand alone CIT return

• What would an IC-DISC return look like? Depends on: S f i i State of incorporation Location(s) of related supplier(s) How Treasury will interpret sourcing rules for IC-DISC “sales”

• What if you currently have an IC-DISC?

75

Michigan Apportionment IssuesMichigan Apportionment IssuesDifferences in CIT v. IIT

CIT IIT

“Sales” include 1. Inventory sales (gross unless Gross receipts from sales ofSales include receipts from what?

1. Inventory sales (gross unless intangible – then net gain)

2. Performance of services that constitutes business activity

3 Rental leasing licensing or use of

Gross receipts from sales of TPP, rental of property and providing of services that constitute business activity (exclude all receipts of3. Rental, leasing, licensing, or use of

tangible or intangible property, including interest that constitutes business activity

4 If not engaged in any other business

(exclude all receipts of nonbusiness income)

4. If not engaged in any other business activities, interest, dividends, and other income from investment assets and activities and from trading assets and activitiesassets and activities

Sourcing of TPP Destination (apply new MBT 60 day rule?) Destination

Throwback Rule Imposed

No Yes

Sourcing of non‐TPP receipts

Location benefit is received Based on costs of performance (all or nothing)

76

ITC Recapture IssuesITC Recapture Issues

• Does an ITC recapture tax benefit rule exist for assets acquired during the MBT years?

• Does the contribution of a tangible asset located in Michigan to a partnership trigger ITC recapture?p p gg p

77

Certificated Credit ElectionCertificated Credit Election

• Certain credits for which “approval” granted prior to 2012• Certain credits for which approval granted prior to 2012• Election is irrevocable• Election made by either: Filing an MBT return for first year ending in 2012; or Filing Form 4889, Accelerated Certificated Credit Request

• Extension/estimate payment is NOT considered making the electionp y g• Calendar year taxpayer has until 12/31/13 to make decision if taxpayer

has a valid extension • Brownfield and historic credit holders can elect to pay MBT in years Brownfield and historic credit holders can elect to pay MBT in years

credit claimed and the CIT in years the credits cannot be claimed • A taxpayer with a credit that becomes available in a later year (i.e.,

2015 battery credit) must file MBT beginning in 20122015 battery credit) must file MBT beginning in 2012

78

Certificated Credit Election Certificated Credit Election Practical Tips

Since the election is irrevocable taxpayers must consider • Since the election is irrevocable taxpayers must consider potential future events Asset sale of the business Change in apportionment profile

• Modeling of different potential future events is highly recommended if the election is being consideredrecommended if the election is being considered

• Must consider ASC 740 ramifications

79

Brownfield Credit Accelerated PaymentBrownfield Credit Accelerated Payment

Use Form 4889 to request an accelerated payment of Brownfield • Use Form 4889 to request an accelerated payment of Brownfield or Historic Preservation Credit

• Certificate had to be issued for tax year beginning after 2011• Forgo 10% of the credit (14% for certain Historic Preservation

Credits)• Filing form creates an MBT filing responsibility (pay greater of Filing form creates an MBT filing responsibility (pay greater of

MBT or CIT that year)• May file anytime during the tax year and Treasury required to

pa ithin 60 da spay within 60 days

80

Michigan Cases Impacting Filing Positions/Refunds


International Business Machines Corp. v. Department of p p fTreasury, Michigan Court of Appeals, No. 306618

• Litigation in IBM addresses whether the MTC election is available under MBT • Litigation in IBM addresses whether the MTC election is available under MBT for 2008-2010

• MCL §205.581 codified the MTC Compact, allowing for the election of UDITPA for income taxes

• On 11/20/12, MI Court of Appeals affirmed the lower court, holding IBM was required to use the MBT apportionment formula and was not permitted to elect to use the MTC’s UDITPA formula (equally-weighted 3 factor) MBT apportionment formula was NOT optional and that taxpayers were required to request

permission to use an alternate apportionment method to use anything except the MBT formula. Court reasoned that enacting a conflicting statute might be an improper way to repeal the

Compact, but not necessarily impermissible. Accordingly, the MBT law repealed by implication the apportionment election provision in the Compactthe apportionment election provision in the Compact.

• 2011 amendment to MTC statute eliminates purported election for MBT in 2011 and for CIT

• On 12/28/12, IBM filed with the MI Supreme Court an Application for Leave to On 12/28/12, IBM filed with the MI Supreme Court an Application for Leave to Appeal

82

Other MTC Election ActivityOther MTC Election Activity

CaliforniaCalifornia• Gillette – CA Ct. of Appeals ruled 10/2/12 that compacts are contracts; thus,

states are prohibited from deviating from the compact without completely repealing it p g

• Under the Gillette court’s rationale, the 2011 legislation seeking to eliminate the purported election may be ineffective, thus election available to taxpayers

Texas• Two recent decisions by the TX Office of Administrative Hearings found

election not available• Suit filed in September 2012 by Graphic Packaging challenging the position

Why do MI companies care?• MTC Election benefits taxpayers depending on their footprints – generally: In-state companies benefit in loss years (MBT – BIT only)

Out-of-state companies benefit in profit years83

Andrie, Inc. v. Department of Treasury, Michigan Andrie, Inc. v. Department of Treasury, Michigan Court of Appeals, 296 Mich. App. 355 (4/26/12)

MI Supreme Court granted motion for appeal• MI Supreme Court granted motion for appeal• Main issues with broad application: Whether the Court of Appeals correctly determined that a retail transaction pp y

in Michigan subject to the sales tax is not subject to the use tax. Whether a retail purchaser is entitled to a presumption that sales tax is paid

on retail transactions in Michigan.

84

Personal Property Tax Reform


Personal Property Tax ReformPersonal Property Tax Reform

• Bills signed at the end of 2012 provide personal property tax • Bills signed at the end of 2012 provide personal property tax exemptions for “small taxpayers” and “eligible manufacturing personal property” (“EMPP”)

• Small taxpayer exemption• Small taxpayer exemption Personal property of each owner or person “having control” with a total value of

$40,000 or less in each jurisdiction 100% exempt beginning in 2014

• EMPPEMPP 100% exemption beginning in 2016 if purchased by first owner before 2006 or after

2012 If purchased 2006-2012, 100% exemption goes into effect based on year purchased (no

l t th 2023)later than 2023)

• NOTE: PPT reform is contingent upon voters approving an August 2014 ballot proposal

86

Personal Property Tax ReformPersonal Property Tax ReformLocal Funding Issue

Source: Michigan Personal Property Tax Reform, January 2013, Michigan Economic Development Corporation (www.MichiganAdvantage.org)

87

Unclaimed Property


Overview of Unclaimed PropertyOverview of Unclaimed Property

N t T• Not a Tax• Traditional “Nexus” Standards Do Not Apply

U id C l Li bili• Unpaid Contractual Liability• Intangible or Tangible Personal Property U l i d b h O Unclaimed by the Owner Prescribed Dormancy Period

• Financial Statement Presentation not • Financial Statement Presentation not representative of unclaimed property exposure

89


T f U l i d P tTypes of Unclaimed Property: Uncashed payroll or commission checks; Uncashed payable/vendor checks; Uncashed payable/vendor checks; Gift certificates; Customer merchandise credits, deposits, refunds or Customer merchandise credits, deposits, refunds or

rebates; Overpayments/unidentified remittances; Suspense accounts; and Unused/outstanding benefits (non-ERISA).

90


Whi h St t C Cl i (P i it R l )?• Which State Can Claim (Priority Rule)? First Priority – State of Last Known Address of the Owner Second Priority State of Incorporation of the Holder Second Priority – State of Incorporation of the Holder

91

Unclaimed PropertyUnclaimed PropertyCurrent Environment - Increased Enforcement

States have turned to unclaimed property laws as a source • States have turned to unclaimed property laws as a source of revenue;

• State auditors and third party auditors are utilized by many p y y ystates;

• Audits are expanded to include more companies, including F t 1000 iFortune 1000 companies;

• Audits can be very intrusive – going back anywhere between 5 and 20 years; andbetween 5 and 20 years; and

• States are using amnesty programs to assist companies that are not in compliance.

92

Unclaimed PropertyUnclaimed PropertyMichigan Update

Recent legislation passed in 2012• Recent legislation passed in 2012 Public Act 144 (MCL 567.257a)

• Provides a partial exemption for “business-to-business” transactions• Effective for filing periods after 2009• Applies to credit balances, overpayments, deposits, refunds, discounts,

rebates, credit memos or unidentified remittances• Does NOT apply to outstanding checks, drafts, or similar instruments

Public Act 292 (MCL 567.250; MCL 567.252)• Shortens SOL for audits from 10 years to 5 years for all B-to-B

itransactions

• WARNING: List of companies to target next has been created

93

Advantages and Disadvantages of Advantages and Disadvantages of Voluntary Disclosure

AdvantagesAdvantages• Reduced look back period;• Elimination of penalty and interest;• Closure of all prior periods and voluntary disclosure period (however the state • Closure of all prior periods and voluntary disclosure period (however, the state

typically retains the right to audit the voluntary disclosure for a period of time from the date of execution of the voluntary disclosure); and

• Increased control over the methodologies utilized and positions taken.g p

Disadvantages• Coming forward could expose other related entities to an unclaimed property Co g o wa d could e pose ot e elated e t t es to a u cla ed p ope ty

audit;• States typically allow six months to complete the self review process,

extensions are available on a case by case basis; and• Payment of agreed upon liability is generally expected within 30 days of

demand.94

Other Michigan Developments


Recently Passed LegislationRecently Passed Legislation

MBT t h i l ti bill SB 1037• MBT technical corrections bill – SB 1037 Ultimate destination – clarify definition (60 day rule) NOL successor permit carryover in corporate reorgs as NOL successor – permit carryover in corporate reorgs as

under SBT Defines reasonable return of capitalp Definition of “officer” – clarify definition

• Clarification that a “return” includes a combined, consolidated, or composite return whether or not any tax was paid or reported including zero. (HB 5543)(HB 5543)96

Other Michigan DevelopmentsOther Michigan DevelopmentsProposed New or Reintroduced Legislation in 2013

SB 65: Extends FTW exemption certificate language to all • SB 65: Extends FTW exemption certificate language to all members of FTEs who are not NR individuals

• SB 142/143 (previously SB 335/336): Amends the definition (p y )of “prewritten computer software” to exclude granting the right to use prewritten software installed on another person’s serverperson s server

• SB 155: Includes the more disputed MBT technical corrections that were taken out of SB 1037 (COD income, self-constructed assets, materials and supplies definition, credit ordering, I/C eliminations for UBG)

97

Other Michigan DevelopmentsOther Michigan DevelopmentsProposed New or Reintroduced Legislation in 2013 (cont)

SB 156 M MBT t h i l ti (ITC • SB 156: More MBT technical corrections (ITC recapture benefit rule, RZ credit, COD income)

• HB 4002: Increase in interest rate if Treasury does • HB 4002: Increase in interest rate if Treasury does not pay refunds timely

• HB 4003: Provides for Offer in Compromise (OIC)• HB 4003: Provides for Offer in Compromise (OIC)• HB 4202/4203: Click through nexus bills (sales/use

tax)tax)• HB 4288-4292: Restricts use of sampling during

audits; Makes work-papers and audit manuals audits; Makes work papers and audit manuals available98

Other Michigan DevelopmentsOther Michigan Developments

S l bill t i t d d i 2013 t bl th • Several bills not reintroduced in 2013 – notably the “bounty hunter” proposed bills that eliminated contingency feescontingency fees

• MACPA still pushing for CIT technical corrections• Treasury continues to work on RABs related to CIT• Treasury continues to work on RABs related to CIT Issued RAB 2013-1: CIT Unitary Business Group Control Test and

Relationship Tests Draft RAB 2013-xx: Definition of “actively solicits” Draft RAB 2013-xx: Exemption for Foreign Diplomatic Personnel

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Contact InformationContact Information

Angela AcostaAngela AcostaEmail: [email protected]

Emily IrishEmail: [email protected] 802 3424616.802.3424

Andrea CollinsEmail: acollins@bdo comEmail: [email protected]

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