North Carolina: reducing tax rates, phasing-in single sales factor apportionment and considering market-based sourcing

North Carolina enacted budget legislation which reduces the corporate income tax rates, adopts a 100% sales factor for apportionment, and increases the minimum and maximum amounts under the franchise tax. In addition, some taxpayers may be required to file an information report with their 2015 tax return to help the state determine whether to adopt market-based sourcing.

Corporate Tax Rate

Effective for tax years beginning on or after January 1, 2016, the tax rate for C corporations is decreased from 5% to 4%. The tax rate will be decreased further to 3% if the amount of net general fund tax collected in a fiscal year exceeds $20.975 billion.

Sales Factor for Apportionment

North Carolina is phasing in a 100% sales factor. Currently, the sales factor is double-weighted. Effective for tax years beginning on or after January 1, 2016, the sales factor will be triple-weighted. Effective for tax years beginning on or after January 1, 2017, the sales factor will be quadruple-weighted. Effective for tax years beginning on or after January 1, 2018, only a sales factor will be used for apportionment.

Taxpayers May Be Required to File Informational Report for 2015 Tax Year

The Revenue Laws Study Committee is directed to study the calculation of the sales factor using market‑based sourcing. To help the Committee determine the effect of market‑based sourcing on corporate taxpayers, each corporate taxpayer with apportionable income greater than ten million dollars ($10,000,000) and a North Carolina apportionment percentage less than one hundred percent (100%) is required to file an informational report with the Department of Revenue.

As part of its 2015 income tax return, each corporation required to file an informational report will be required to show the calculation of the taxable year 2014 sales factor using market‑based sourcing.

Franchise Tax

Effective January 1, 2017 for taxes due on or after that date, the franchise tax will be calculated on net worth. Currently, it is calculated on issued and outstanding capital stock, surplus, and undivided profits. The minimum tax was increased to $200 from $35 and the maximum tax was increased to $150,000 from $75,000. 

From H.B. 97, Sections 32.13, 32.14 and 32.15

collaborating with Bloomberg BNA on new state tax analysis tool

Working in the state tax field for 20+ years, I have experienced companies using all kinds of excel spreadsheets for what-if planning, tax provision analysis, quarterly estimates, and tax audit response. Some have worked well, and others, not so much. If your company or your clients are looking for a new tool, I suggest you check out the BNA State Tax Analyzer by Bloomberg BNA.

The BNA State Tax Analyzer is the industry first and only multi-state, multi-year, multi-scenario state tax analysis tool for corporate income tax. It is a cloud-based solution that delivers a full-audit trail, permissions control, and automatic tax-law updates. In fact, I collaborated (and continue to collaborate) with Bloomberg BNA’s software products group to ensure that state tax law (back to 2000) and recent legislative changes are integrated into the product.   

Some of the features include:

• Out-of-the-box calculations, with built-in tax rules and rates for all states that have a corporate income tax, plus the District of Columbia
• Familiar grid approach fits into your current work style
• Audit trail shows who did what when, giving you the SOX controls you need
• Permissions control protects your work
• Customized computations allow you to handle special industry calculations
• Side-by-side comparisons let you see the difference between two scenarios or total across multiple scenarios
• Flexible reporting basis allows you to switch between combined/unitary, consolidated, and separate entity reporting as needed

With its comprehensive set of calculations and audit trail capabilities, BNA State Tax Analyzer can complement or replace risky, time-consuming spreadsheets – saving tax departments hundreds of hours of time and effort every year.

• Take complexity and risk out of corporate state tax calculations
• Gain greater insight with reserve planning for ASC 740 analysis
• Ensure accuracy of state tax returns
• Accelerate tax audits
• Demonstrate compliance with thorough documentation

To learn more, visit here.     

Tennessee issues guidance regarding nexus and apportionment

Tennessee's 2015 franchise and excise tax guide provides additional information that companies operating inside and outside Tennessee should review and plan accordingly in advance of 2016.

1. Economic nexus standard - expanding criteria under which an out-of-state vendor may incur nexus
2. Apportionment formula - changed apportionment formula by triple-weighting the sales factor
3. Market-based sourcing - additional information and clarification regarding application of market-based sourcing for sales other than tangible personal property
4. Distribution apportionment incentive - special elective apportionment rule for taxpayers who sell very large volumes of product to regional distribution

Economic Nexus Standard

For tax years beginning on or after January 1, 2016, out-of-state businesses not already subject to Tennessee taxes will be subject to franchise and excise taxes to the fullest extent allowed by the Constitution. Such nexus includes, but is not limited to, any of the following:

• The taxpayer is organized or commercially domiciled in Tennessee;
• The taxpayer owns or uses its capital in Tennessee;
• The taxpayer has a systematic and continuous business activity in Tennessee that has produced gross receipts attributable to customers in Tennessee; or
• The taxpayer has a bright-line presence in the state. A person has a bright-line presence in this state for a tax period if any of the following applies:
  • Receipts: > $ 500,000 or 25% of total receipts from sales in TN
  • Property: > $ 50,000 or 25% of total property by value in TN
  • Payroll: > $ 50,000 or 25% 

Triple-Weighting of Sales Factor

For tax years beginning on or after July 1, 2016. the apportionment formula consists of the property factor, plus the payroll factor, plus three times the receipts factor, and the denominator is five (5).

Market-Based Sourcing

For tax years beginning prior to July 1, 2016, sales of other than tangible personal property are allocable to Tennessee if a greater proportion of the earnings-producing activities are performed in Tennessee. Effective for all tax years beginning on or after July 1, 2016, sales, other than sales of tangible personal property, are in Tennessee if the taxpayer’s market for the sale is in Tennessee. (see page 52 of the guide for details on when the taxpayer's market is in Tennessee)

Distribution Incentive

Effective January 1, 2016, a taxpayer that meets the gross sales threshold and the receipts factor threshold (one billion dollars or the taxpayer's receipts factor exceeds 10%) during the tax period qualifies for the application of a new distribution incentive and may elect the incentive by filing an election form with the Department on or before the due date of the tax return for the period for which such election is to take effect. The election remains in effect until revoked by the taxpayer or until the taxpayer no longer qualifies for the election.

"Certified distribution sales" means sales of tangible personal property made in Tennessee by the taxpayer to any distributor, whether or not affiliated with the taxpayer, that is resold for ultimate use or consumption outside the state; provided, that the distributor has certified that such property has been resold for ultimate use or consumption outside Tennessee. (see page 53 of guide for details on when the incentive applies)

states change interpretation without any change in law?

Throughout my career I have faced several instances where states have made audit assessments or taken positions under audit that contradict the position the state has taken in the past when it has audited the company.  This change in position by the state has occurred even when there has been NO CHANGE in the state's statutes, rulings and court cases since the last audit.

Should the state be able to change their position without any change in authority?  In most cases I would say no.  Unfortunately, when you challenge the position within the audit, you may not get anywhere.  You may have to go to appeals or even court to resolve.  My experience is that resolution is highly likely at the appeals level (this obviously depends on the facts of each case).

With that said, getting back to my original question, should a state be able to change its position without any change in authority?  Allowing states to do so causes a taxpayer to incur time and money to challenge the change in position, when there is no reasonable basis for the change.  

Why would a state make an assessment when there is no change or basis for the assessment?  Well, the answer may be that the state has changed its policy or interpretation of a statute or regulation.  The state may believe that this change in interpretation is enough.  It may or may not be, depending on the facts of the case.

Overall, if you run into this situation don't just accept it.  Question it.  Challenge it.  Just remember, you may have to go to appeals to resolve the matter.  

DISCLAIMER:  Each case is different and states may have justification for their change in position.  This is a reminder to not just accept the change, but to seek to clearly understand the state's position so you can determine if you should challenge it. 

the first day . . . . . "elbows and knees"

Today is the first day of school for my daughters. One is a sophomore in high school and the other is starting middle school. I know for some of you, school started weeks ago. Well, regardless of when, the situation is the same. We all go through the preparation, the planning, the registering, the fee-paying, school supplies and clothes shopping, etc. Then the day draws closer, the last day of summer dawns, the night before comes. After all of the preparation, the reality of new classes, new teachers, new schools, new friends, tests and quizzes sets in. A little anxiety (or a lot) comes to mind. That's when we pray. We trust. 

As my daughters start back today, I have the innate feelings of my responsibility. My natural instincts and priorities are to: provide, protect and lead. These are my objectives and my role in my family. As most parents, we seek to provide for our families. Provide them not only with material things, but with love, confidence, self-worth and a place of serenity so they can grow to be strong and independent. We want to provide them with opportunities and freedom to pursue the gifts and talents that were given to them. 

We also want to protect them. I can't tell you how strong this emotion is in me. Maybe it's because I have daughters, but I would do anything to protect them. I have a phrase that I created and I tell my girls, "elbows and knees." It stands for two things. One, the elbows and knees are the hardest parts of your body. Use them to defend yourself physically if necessary. Second, it is a philosophy for life. Many things in our lives will push us down. Will attempt to discourage and make us feel less than. The road to achieving our dreams and goals will be difficult (if the dream is worth pursuing); thus, we must be willing to do the work. To dig in. To fight back against a world that seems to push. We must use our "elbows and knees."

Last but not least, we must lead our families. We cannot rely on the world, the schools, church or the government to teach our kids how to live, how to treat others, how to achieve, how to love, etc. That is our jobs as parents. 

How does this relate to state taxes?

Well, state tax compliance, audits or planning can sometimes cause anxiety. That's when we are instincts to provide, protect and lead our companies and tax departments must kick-in. We must use our 'elbows and knees' to stand. To fight for what we know is right. To dig deeper. To have wisdom to discern when to fight and when to walk away.

taxpayer rights have expiration dates

Taxpayers have rights at the federal and state levels. Do you know what they are? Have you really looked at them? We often assume we know what the taxpayer bill of rights say, or that they don't really matter, but it's good to be reminded.

I am planning a series of blog posts covering private letter ruling request procedures by each state, but wanted to start with taxpayer rights. Since I am based in Virginia, let's start here.

In Virginia, the Taxpayer Bill of Rights are provided to guarantee that (1) the rights, privacy, and property of Virginia taxpayers are adequately safeguarded and protected during tax assessment, collection, and enforcement processes administered under the revenue laws of the Commonwealth, and (2) the taxpayer is treated with dignity and respect.

The Taxpayer Bill of Rights compiles, in one document, brief but comprehensive statements which explain, in simple, nontechnical terms, the rights and obligations of the Department and taxpayers. The rights afforded taxpayers to assure that their privacy and property are safeguarded and protected during tax assessment and collections are available only insofar as they are implemented in other sections of the Code of Virginia or rules of the Department.

The rights guaranteed to Virginia taxpayers in the Code of Virginia and the Department's rules and regulations are:

1. The right to available information and prompt, courteous, accurate responses to questions and requests for tax assistance.
2. The right to request assistance from a taxpayers' rights advocate of the Department, who is responsible for facilitating the resolution of taxpayer complaints and problems not resolved through the normal administrative channels within the Department.
3. The right to be represented or advised by counsel or other qualified representatives at any time in administrative interactions with the Department; the right to procedural safeguards with respect to recording of meetings during tax determination or collection processes conducted by the Department; and the right to have audits, inspections of records, and meetings conducted at a reasonable time and place except in criminal and internal investigations.
4. The right to abatement of tax, interest, and penalties attributable to any taxes administered by the Department, when the taxpayer reasonably relies upon binding written advice furnished to the taxpayer by the Department through authorized representatives in response to the taxpayer's specific written request which provided adequate and accurate information.
5. The right to obtain simple, nontechnical statements which explain the procedures, remedies, and rights available during audit, appeals, and collection proceedings, including, but not limited to, the rights pursuant to this Taxpayer Bill of Rights and the right to be provided with an explanation for denials of refunds as well as the basis of the audit, assessments, and denials of refunds which identify any amount of tax, interest, or penalty due and which explain the consequences of the taxpayer's failure to comply with the notice.
6. The right to be informed of impending collection actions which require sale or seizure of property or freezing of assets, except jeopardy assessments, and the right to at least fourteen days' notice in which to pay the liability or seek further review.
7. After a jeopardy assessment, the right to have an immediate review of the jeopardy assessment.
8. The right to seek review, through formal or informal proceedings, of any adverse decisions relating to determinations in the audit or collections processes.
9. The right to have the taxpayer's tax information kept confidential unless otherwise specified by law.
10. The right to procedures for retirement of tax obligations by installment payment agreements which recognize both the taxpayer's financial condition and the best interests of the Commonwealth, provided that the taxpayer gives accurate, current information and meets all other tax obligations on schedule.
11. The right to procedures for requesting release of liens filed by the Department and for requesting that any lien which is filed in error be so noted on the lien cancellation filed by the Department and in a notice to any credit agency at the taxpayer's request, provided such request is made within three years of the release of the lien by the Department.
12. The right to procedures which assure that the individual employees of the Department are not paid, evaluated, or promoted on the basis of the amount of assessments or collections from taxpayers.
13. The right to have the Department begin and complete its audits in a timely and expeditious manner after notification of intent to audit.

The key to the taxpayer bill of rights is to know them and know the procedures surrounding each right. Some taxpayer rights require action by the taxpayer to enforce the right within a specific passage of time (i.e., 30 days, 60 days or 3 years). This is specifically true in regards to protesting audit assessments and filing refund claims. Consequently, some rights have expiration dates.

They say, "knowledge is power." They also say, "the greatest gap in the world is the gap between knowing and doing." When dealing with state taxes, they couldn't be more right.