California Proposes Eliminating Water's-Edge Election

California Senator Ricardo Lara has introduced SB 567 which would eliminate the water's-edge election for corporations who file California combined returns. Corporations would be required to file on a worldwide basis.

The bill would remove the water’s-edge election for taxable years beginning on or after January 1, 2017, and would specify that existing electors would be unable to elect to file using the water’s-edge method for taxable years beginning on or after January 1, 2023.

I have written on this subject before as to why states may not want to require worldwide reporting. The California Department of Finance believes water's-edge reporting is costing the state $2.3 billion in revenue currently. The problem with that figure is that it may not be accurate every year once worldwide reporting is the only option. Also, since the goal of federal tax reform is to encourage and increase investment in the United States, would requiring worldwide tax reporting lower tax revenue in California due to apportionment factor dilution?

M&A Activity Expected to be Strong For 2017

According to a KMPG, LLP survey, 84% of those surveyed expect to initiate a deal in 2017, 75% plan on doing multiple deals. Middle market deals are expected to dominate in 2017 and 78% say their deals would be worth less than $500 million. The most active industry is technology (45%).

Not all deals made it to completion in 2016. According to the KPMG survey, deal failures were most frequently caused by valuation disagreements, a bidding loss and issues revealed during due diligence (financial, operational and management).

Here is  link to the KPMG survey.

Here is a link to a Middle Market M&A study put together by Citizens Commercial Banking.

Here is a link to a Forbes article on the 4 biggest trends in M&A for 2017.

Is your company considering restructuring its business?  Perhaps creating new legal entities or re-aligning its lines of business into different entities?  Changing the ownership structure of the legal entities within the commonly controlled affiliated group?  Or maybe it is considering acquiring or merging with a new business (unrelated third-party)?

Regardless of your company's situation, in each of the above mentioned scenarios, your company must perform its due diligence prior to completing any transaction or restructuring. That due diligence should take into consideration the impact the restructuring or transaction will have on the business operations, legal obligations, insurance, finance, and tax, etc.  

In regards to the tax implications, there can be significant tax ramifications on the transaction or restructuring itself.  In addition to the federal tax impact, the state and local tax impact can be material and varied.  Some of the potential state and local taxes to take into consideration are:  income tax, gross receipts taxes, franchise taxes, sales and use taxes, property taxes and transfer taxes.

Usually the biggest concern in regards to the transaction from a state and local tax perspective are:  

• Is there any sales tax on the sale or transfer of assets or change in ownership? 
• Is there any transfer tax on the transfer of assets or change in ownership?

The answers to these questions depends on the state or states involved.

In addition to the above, the impact that the restructuring will have on the business' state tax nexus (taxable presence) position across the country should be reviewed and considered before making any changes.

So What?

If your company is currently considering any restructuring or acquisition, don't forget about performing state and local tax due diligence.  If the transaction ends up costing the company a significant amount of state tax dollars now or in the future, you may be asked if these issues were considered or reviewed prior to completing the transaction.

Does your company have potential tax liability in multiple states?

Does your company have potential tax liability in multiple states?

Is your company looking for options to resolve?

The Multistate Voluntary Disclosure Program (“MVDP”) provides a way for a taxpayer with potential tax liability in multiple states (including the District of Columbia) to negotiate a settlement, using a uniform procedure coordinated through the National Nexus Program (“NNP”) staff of the Multistate Tax Commission (“Commission”).

For all of the details, go here.

Are you concerned about what tax law changes states will make this year?

The Pew Charitable Trusts provides The Stateline 2017 calendar which includes each state’s legislative schedule as well as maps of the political landscape. Keep it handy to help you track legislative action in all 50 states.

LEVERAGE SALT BLOG NAMED ONE OF 50 BEST

The LEVERAGE SALT blog has been chosen as one of the Top 50 Best Tax Blogs for 2017 by WalletHub. WalletHub is holding a competition where people vote to determine the final ranking of the 50 tax blogs. The voting starts today, February 27, and runs to March 13, 2017.

If you enjoy this blog, I would appreciate your vote. Help make a solo practitioner's blog on state taxes number #1. To vote, GO HERE.

If you haven't received a copy of my FREE SPECIAL REPORT, "The Top 15 State Tax Blind Spots and Top 20 Issues that Impact Businesses of All Sizes," go get it here.

Make it a great day!

Not All Intercompany Transactions Are Created Equal

For any group of affiliated entities, intercompany transactions, such as intercompany purchases, loans, licensing, services, and management, are a way of life. Even though those transactions are a part of normal business operations, they have created problems and opportunities in states that have not adopted combined reporting. States have sought to disallow the deduction of related-party expenses under the presumption that the transactions were not entered into with business purpose or economic substance, or that they distorted the true reflection of income earned in the state.

It could be argued that taxpayers abused the positive effect of ‘‘true’’ intercompany transactions by using special purpose entities such as sales companies, finance companies, and the infamous intangible holding company to shift income from one entity to another or from one state to another. The use of those types of entities and transactions exploded in the 1990s. Since then, states have worked to end that perceived abuse by enacting related-party expense addback legislation or adopting combined reporting. As a result, the ability to use intercompany transactions to shift income has become very difficult.

Taxpayers argue that economic substance and business purpose other than tax savings have always been integral parts of any state tax planning (even in the 1990s). However, taxpayers today approach state tax planning in terms of focusing on the business objective first, and then seeking to implement that objective in a tax-efficient manner. Some practitioners refer to that as business alignment planning. I like to describe it as not putting the cart before the horse.

To read more, check out my article from Tax Analysts State Tax Notes on October 28, 2013. 

Don't forget to sign up to attend the free Bloomberg BNA webinar tomorrow that I am co-presenting: "State Tax Planning for Related-Party Transactions." 

I hope you can join me to discuss:

• Triggers which create problems and opportunities (in regards to related-party transactions)
• Common inter-company transactions
• 6 ways states may respond to related-party transactions (including recent developments and how to analyze, defend and plan)