THE GREATEST SALT CONSULTANT: "ONE-HIT WONDER"

Question: What makes a remarkable state and local tax consultant or client experience?

Over the next 7 weeks, I will share one of the 7 best practices of being "the Greatest SALT Consultant" or GSC each week. Here is this week's.

Strategic Partner or  “One-Hit Wonder”

My first point, based on years of experience, is that state and local tax consultants should seek to be strategic partners with their clients, not be a “one-hit wonders.” Meaning, the Greatest SALT Consultant (GSC), should be someone that develops strong relationships with their clients. Through those relationships, the GSC will gain a deeper understanding of his or her client’s, or prospective client’s business, and be in a better position to provide practical, customized SALT solutions.

The opposite of the GSC is a “one-hit wonder,” or a SALT consultant that “hits up” clients with the “idea of the day.” This SALT consultant is more focused on meeting his or her personal/firm goals instead of focusing on solving the client’s problem with the most practical solution.

The “one-hit wonder” is here today, gone tomorrow; not only before or after a project, but sometimes even during a project. As a client, you can be “in the dark” as to the status of the project, what the consultant is finding, and what the potential solutions are (this should not happen).

The GSC provides updates throughout the project to the client, and advises them as to changes or alternative solutions that arise.

Have you experienced a "one-hit wonder"?

Rhode Island Re-Issues Proposed Combined Reporting Regulations

Rhode Island has re-issued (updated) proposed combined reporting regulations. A public hearing to consider the proposed regulation will be held on February 22, 2016 at 10:30 a.m. Eastern Time at the Rhode Island Division of Taxation, One Capitol Hill, Providence, Rhode Island.

Written or oral comments concerning the proposed regulations may be submitted to Michael F. Canole, Rhode Island Division of Taxation, One Capitol Hill, Providence, R.I. 02908 or via his telephone number (401) 574-8729 or e-mail: michael.canole@tax.ri.gov. by February 22, 2016. 

The following is a high-level summary (from the preamble of the proposed regulations). 

Staying the Same

The Division of Taxation has carried forward a number of elements of Regulation CT 11-15 into the new proposed regulations:  

For example:

• Definitions of certain key terms – including “combined group” and “common ownership” – remain the same or substantially the same as in the prior regulation.
• The basic approach to determining the composition of a combined group is largely the same.
• Water’s edge” treatment is mandatory.
• The basic approach to determining the unitary business remains the same – relying largely on tests set forth in certain U.S. Supreme Court cases.
• For Rhode Island combined reporting purposes, an affiliated group is still able to elect to use the same members that the affiliated group includes in filing its federal consolidated return.
• A tracing protocol applies to net operating losses (NOLs).
• A tracing protocol applies to tax credits.
• The combined group still must appoint a designated agent. The agent is required to act on behalf of the combined group in its own name in all matters related to the combined return.
• For a combined group filing on extension, the extended due date will be seven months after the normal filing deadline. Thus, for a combined group whose return is due March 15, the deadline will be October 15.

Differences

The proposed regulation differs from the pro forma regulation in a number of ways,
partly due to changes in statute.

For example:

• While “water’s edge” treatment continues to be mandatory, and the basic approach to determining the composition of a combined group is largely the same, the following regulation incorporates a definition of the term “tax haven” to reflect the definition in statute. As a result, certain corporations may or may not have to be included in the combined group.
• Under the regulation for pro forma combined reporting, corporations had to apportion income using two methods that are named for seminal California court cases: the Joyce and Finnigan methods. As the following regulation spells out, only the Finnigan method is now used for apportionment by entities that are treated as C corporations for federal income tax purposes.
• When the prior regulation was promulgated, three-factor apportionment applied, using sales (total receipts), property, and payroll. However, for tax years beginning on or after January 1, 2015, a single factor – sales (total receipts) – is used for apportionment purposes by entities that are treated as C corporations for federal income tax purposes, whether or not part of a combined group.
• When the prior regulation was promulgated, the sales factor forapportionment purposes was determined by C corporations using the cost-of-performance method. However, for tax years beginning on or after January 1, 2015, market-based sourcing is used by entities treated as C corporations for federal income tax purposes, whether or not part of a combined group, in place of the cost-of-performance method.
• For Rhode Island combined reporting purposes, an affiliated group of corporations uses the same members that the affiliated group includes in filing its federal consolidated return. However, effective for tax years beginning on or after January 1, 2015, once the election is made, it must continue for five years, including the year the election is made. (For purposes of pro forma combined reporting, the election was binding for two years.)
• The prior regulation asked affected taxpayers to calculate a deduction, related to their balance sheets, in accordance with Financial Accounting Standard 109 (FAS 109).  However, the deduction is not prescribed by statute for purposes of Rhode Island mandatory unitary combined reporting.
• When the prior regulation was promulgated, a corporation’s Rhode Island tax was the greater of the franchise tax or the corporate income tax, and the corporate income tax rate was nine percent (9%). For tax years beginning on or after January 1, 2015, the franchise tax is repealed and the corporate income tax rate is seven percent (7%).
• The following regulation clarifies that, for purposes of combined reporting, gross receipts include, among other things, gross income from intangible personal property as well as from the performance of services.
• The following regulation makes clear that “captive insurance companies” taxed under RIGL Chapter 27-43 should not be included in a combined return.

To view more details and follow the status of the regulations, go to Rhode Island's combined reporting web page.

Update: Nevada Commerce Tax

Nevada recently published a Commerce Tax Registration Process Informational Chart. It is a flow-chart that can help your corporation determine if they need to register.

If your corporation is organized or incorporated in Nevada, it will be registered automatically. All other corporations should make the determination based on answering a nexus questionnaire. 

At the end of March, beginning of April, corporations will receive a "Welcome to Commerce Tax" letter (how nice). The letter will have your corporation's Tax ID number on it. Go to the chart for additional details.

Also, check out Nevada's website or my previous posts on the Nevada Commerce Tax.

UPDATE: North Carolina Publishes Guidelines for Market-Based Sourcing 2015 Filing Requirement

As an update to yesterday's post regarding North Carolina's market-based sourcing information reporting requirement, North Carolina has published guidelines.

1. Introduction and Summary - Guidelines for Market-Based Sourcing
2. Guidelines for Computing the Sales Factor Based on Market-Based Sourcing

North Carolina Imposes Additional Filing Requirement on Corporations for 2015

In September, 2015, the Governor of North Carolina signed HB 97. HB 97 made several changes to North Carolina tax law such as phasing-in single-sales factor apportionment. However, the one key change I want to bring to your attention is the "informational reporting requirement" that North Carolina is imposing on corporations (see Section 32.14 of HB 97).

HB 97 directs the Revenue Laws Study Committee 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.

What Is Required to Be Reported?

The report is required to show the calculation of the taxable year 2014 sales factor using market‑based sourcing. 

The informational report must contain the following information:

• The corporation's 2014 apportionment percentage used on the corporation's 2014 North Carolina corporate tax return.
• The corporation's 2014 apportionment percentage as calculated using market-based sourcing.
• The corporation's primary industry code under NAICS. 
• Any other information prescribed by the Secretary.

How is Market-Based Sourcing Calculated?

In general terms, the sales factor calculation is based on the model market‑sourcing regulations drafted by the Multi‑State Tax Commission. 

Specifically:

• The sale, rental, lease, or license of real property is sourced to North Carolina if it is located in North Carolina.
• The rental, lease, or license of tangible personal property is sourced to North Carolina if it is located in this State.
• Services are sourced to North Carolina if the service is delivered to a location in North Carolina.
• Intangible property that is rented, leased, or licensed is sourced to North Carolina if it is used in North Carolina. Intangible property utilized in marketing a good or service to a consumer is "used in this State" if that good or service is purchased by a consumer who is in North Carolina.  A contract right, government license, or similar intangible property that authorizes the holder to conduct a business activity in a specific geographic area is "used in this State" if the geographic area includes all or part of North Carolina.
• Receipts from intangible property sales that are contingent on the productivity, use, or disposition of the intangible property are treated as receipts from the rental, lease, or licensing of the intangible property. All other receipts from a sale of intangible property are excluded from the numerator and denominator of the sales factor.

When Is It Due?

The informational report is due at the time corporate taxpayer's return is due for the 2015 taxable year. No extensions. 

What If I Don't Comply?

North Carolina can assess a $5,000 penalty for failure to timely file an informational report.

Form

Here is a link to the form, Form CD-400MS.  

Problems With This Requirement?

North Carolina should not impose a penalty for non-filing. I know North Carolina needs an incentive to make taxpayers comply, but a $5,000 penalty (or 'stick') is not the way to do it. North Carolina could offer a 'carrot' instead. Perhaps a credit or something similar could be offered.

Taxpayers should be able to obtain an extension for filing the form. If the taxpayer extends its 2015 return, it should not be forced to file Form CD-400MS earlier. This creates an extra compliance burden on taxpayers that just isn't necessary.

Sidebar: All information reporting requirements like this one, remind me of the Maryland combined reporting information requirement 'debacle' a few years ago. 

What do you think?

Delaware Enacts Single-Sales Factor Apportionment

The Governor of Delaware signed "The Delaware Competes Act" (HB 235) into law on January 27, 2016 (press release). 

The summary of the Act states that "the principal change in the Act is to remove disincentives for companies to create Delaware jobs and invest in Delaware property that currently exists in how income is apportioned to Delaware for purposes of the corporate income tax." The Act attempts to accomplish this goal by changing Delaware's apportionment formula from a three-factor formula (property, payroll, sales) to a single-sales factor formula.

Phase-In for Most

The change to the single-sales factor apportionment will be phased-in by first doubling the weight on the sales factor in tax year 2017, and then gradually relying exclusively on the sales factor beginning in 2020 (i.e., triple-weighted sales factor in 2018, six-times-weighted sales factor in 2019, single-sales factor in 2020). Corporations organized under the laws of foreign countries that do business in the United States may not dilute their property and payroll factors by including property and payroll that is located outside of the United States in the denominator of these fractions.

Starting in 2017

Despite the phase-in for most corporations, starting in 2017, telecommunications corporations and corporations with their worldwide headquarters located in Delaware that make capital investment in those facilities may use either single sales factors or equally weighted, three-factor apportionment.

Other Changes

The Act also simplifies business tax compliance for smaller businesses by reducing tax payment and filing burdens. For example, the Act doubles the thresholds at which businesses have to make monthly gross receipts tax and withholding filings, enabling hundreds of Delaware businesses to file quarterly instead. The Act also provides that filing thresholds and tax calculations will be indexed for inflation, which locks-in the simplification and efficiency gains for future taxpayers.

The Act attempts to simplify compliance for smaller business. Currently, all corporations must pay 50% of their estimated tax liability for the first quarter of their taxable year, followed by payments of 20%, 20% and 10% in each of their second through fourth quarters. The Act allows smaller businesses with receipts of less than $20 million to make use of a simpler, evenly-weighted (25% per quarter) schedule. Further, the Act updates the calculation for the penalty for underpayment of estimated tax, which has not changed in more than 30 years.