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STATE AND LOCAL TAXES (SALT): CURRENT DEVELOPMENTS
Bruce Nelson, M.A., CPA
EKS&H
bnelson@eksh.com
(970) 282-5446
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Federal Developments in SALT
Marketplace Fairness Act (MFA) of 2015
•Federal legislation that addresses sales tax collection onremote sales via the Internet
•Essentially the same as last year’s proposal
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Federal Developments in SALT
What will the MFA do?
The bill will allow qualifying states to require remote sellers to collect sales anduse tax on sales in that state.
Qualifying State
A member of the Streamline Sales Tax Agreement, or a state must simplify byproviding --
A single return filed with a single entity that handles all administrationincluding audits.
Uniform tax base.
Free boundary database, with taxability matrix, and free “hold harmless”software
Small Seller Exception
Sellers with gross annual receipts of $1 million or less in remote sales are exempt.
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Federal Developments in SALT
Remote Transactions Parity Act
•Similar to the MFA
•Except
–Small seller exemption is $10 million/$5 million/$1million spread over three years
–Catalog seller exemption
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Federal Developments in SALT
Digital Goods and Services Tax FairnessAct of 2015
•The bill would regulate state taxation of downloadedmusic, movies, and books
•Provide uniform sourcing rules
•Prevent “multiple and discriminatory” taxation of digitalgoods
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Federal Developments in SALT
Permanent Internet Tax Freedom Act
•This bill would make the existing ban on state and localtaxes on Internet access and discriminatory taxespermanent
•PITFA passed the House on June 9, 2015 and is sitting inthe Senate
•Companion bill, the Internet Tax Freedom Forever Act,was reintroduced in the Senate on February 10, 2015
•Current bill expires December 11, 2015
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National Developments in SALT - Nexus
•“Click-through Nexus”
•States that have adopted click-through nexus nowinclude Arkansas, California, Connecticut, Georgia,Illinois (ruled unconstitutional but re-enacted), Kansas,Maine, Michigan (Oct. 2015), Minnesota, Missouri,New Jersey, New York, North Carolina, Pennsylvania,Rhode Island, Tennessee, Vermont, and Washington.
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National Developments in SALT - Nexus
•The Direct Marketing Association v. Brohl, 735 F.3d904 (10th Cir. Ct. App., Aug. 20, 2013)(rehearingdenied), petition for certiorari filed United StatesSupreme Court (Feb. 25, 2014); Direct MarketingAssociation v. Brohl, U.S. Supreme Court, Dkt. 13-1032, (March 3, 2015)
•Direct Marketing Ass’n v. Colorado Department ofRevenue, Case No. 13CV34855, Colo. Dist. Ct., Denver(Feb. 18, 2014)
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National Developments in SALT - Nexus
•Out-of-state taxpayers that exceed any of the followingthresholds in the state during the tax period:
–(1) $50,000 of property; or
–(2) $50,000 of payroll; or
–(3) $500,000 of sales; or
–(4) 25% of total property, total payroll, or total sales.
are deemed to be doing business in the state and have anincome tax filing obligation.
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National Developments in SALT - Nexus
•States with factor presence nexus include Alabama,California, Colorado, Connecticut, Kansas, Michigan,New York, Ohio, and Washington.
–Newegg, Inc. v. Testa, No. 2012-234 (Ohio Bd. TaxApp. February 26, 2015)
–Crutchfield, Inc. v. Testa, Nos. 2012-926, 2012-3068,2013-2021 (Ohio Bd. Tax App. February 26, 2015)
–Mason Companies, Inc. v. Testa, No. 2012-1169, 2012-2806 (Ohio Bd. Tax App. April 20, 2015)
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National Developments in SALT - Nexus
•“I am going to reach right through that line and . . . taxyou.”
–Texas Comptroller of Public Accounts, Nos. 201409970H,304-13-5657.26; CPA Hearing No. 106,632 (September 19,2014)
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National Developments in SALT - Apportionment
•Gillette Co. and Subs. v. California Franchise TaxBoard, 209 Cal. App. 4th 938 (Oct. 2, 2012), aff’d onreh’g (Oct. 25, 2012).
•International Business Machines Corp. v. Departmentof Treasury, No. 11-000033-MT, (Mich. Ct. Claims2015)
•Gillette v. Department of Treasury, No. 325258, Mich.Ct. App. (Sept. 29, 2015)
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National Developments in SALT - Apportionment
•The following states provide for single sales factorapportionment:
Arizona (effective 2016)Michigan
California Minnesota
ColoradoNebraska
Georgia New York
Illinois Oregon
Iowa Pennsylvania
Indiana South Carolina
Maine Texas
Utah
Wisconsin
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National Developments in SALT - Apportionment
ABC Corporation does business in two states and has collected thefollowing data with respect to their sales, property, and payroll.The company’s federal taxable income after state modificationswas $1,000,000.
State X State Y Total
Sales12,000,0004,000,000 16,000,000
Property 3,000,0002,000,000 5,000,000
Payroll 1,200,000 800,000 2,000,000
If both states use an equally balanced three-factor apportionment,ABC’s taxable income is apportioned in the following manner:
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National Developments in SALT - Apportionment
State X
Sales (12,000,000/16,000,000)75%
Property (3,000,000/5,000,000)60%
Payroll (1,200,000/2,000,000)60%
Total of factors195%
Divided by three (195/3) 65%
Times taxable income × 1,000,000
State X taxable income $650,000
State Y
Sales (4,000,000/16,000,000)25%
Property (2,000,000/5,000,000)40%
Payroll (800,000/2,000,000)40%
Total of factors105%
Divided by three (105/3) 35%
Times taxable income × 1,000,000
State Y taxable income $350,000
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National Developments in SALT - Apportionment
State X
Sales (12,000,000/16,000,000)75%
Property (3,000,000/5,000,000)00%
Payroll (1,200,000/2,000,000)00%
Total of factors 75%
Times taxable income 1,000,000
State X taxable income $750,000
State Y
Sales (4,000,000/16,000,000)25%
Property (2,000,000/5,000,000)40%
Payroll (800,000/2,000,000)40%
Total of factors 105%
Divided by three (105/3) 35%
Times taxable income 1,000,000
State Y taxable income $350,000
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National Developments in SALT - Apportionment
•“Sales, other than sales of tangible personal property,are in this state if
–The income-producing activity is performed in thisstate; or
–The income-producing activity is performed both inand outside this state and a greater proportion of theincome-producing activity is performed in this statethan in any other state, based on costs ofperformance.”
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National Developments in SALT - Apportionment
•Market-based sourcing
–The theory is to source the sale or gross receipts tothe location of the customer, i.e., the market state
–But what does that mean?
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National Developments in SALT - Apportionment
•How do you define the “market?”
–Where the services are performed?
–Where the services are received?
–Where the benefit of the services are received?
–Where the customer is located?
•Corporate headquarters
•Order location
•Billing office
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National Developments in SALT - Apportionment
•States that have adopted market-based sourcing includeAlabama, California, Georgia, Illinois, Iowa, Maine,Maryland, Massachusetts, Michigan, Minnesota,Missouri, Nebraska, New York, Ohio, Oklahoma,Pennsylvania, Tennessee (effective July 1, 2016), Utah,Washington, and Wisconsin.
•The Triple Threat (California)
–Factor presence standard
–Single sales factor
–Market based sourcing
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Questions?