Will Your Company Owe More or Less State Tax After the Merger?

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.

Additionally, the company can't neglect 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.

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:

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

2. 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.

What do you think are the top issues/topics in state taxation today?

1. State income tax reform/response to federal tax reform (which covers a wide variety of issues - depreciation, foreign income, dividends, charitable contributions, NOLs, Domestic Production Deduction, Sec. 199A, M&E, interest expenses, Sec. 118, related party expenses, deemed repatriation, like-kind exchange repeal, Sec. 179 expense, R&E expenses amortization)
2. Wayfair Supreme Court Case regarding sales tax nexus/collection obligations/possible overturn of Quill/physical presence
3. State taxation of foreign income
4. Market-based sourcing impact (continuing trend)
5. Alternative apportionment (is it all alternative?)
6. Management & utilization of NOLs / 382 NOL issues
7. Combined reporting vs. separate reporting 
8. Single-sales factor apportionment impacts (continuing trend)
9. Whether to utilize Voluntary Disclosure Agreement/Amnesty programs
10. Utilizing and negotiating credits and incentives
11. State income taxation of pass-through entities (new pass-through entity audit rules)
12. Related party expenses / transfer pricing
13. Private letter ruling requests
14. Other?????

Businesses Want to Do Business, NOT Taxes

Businesses are playing a game where the rules keep changing, in the middle of the game. 

Taxes keep changing. A constant battle for businesses to keep up when all businesses want to do is business, not taxes.

Businesses must be able to do business with certainty. State tax laws already lack uniformity and create so many opportunities for businesses to screw up. Now, they keep changing, year to year, day to day.

Over the past few months as state governments have been in session, they have passed numerous pieces of legislation to balance the budget including changes to tax rates, filing methodologies, sourcing rules, etc. along with how or if they will conform to all or parts of federal tax reform.

I have been monitoring state tax legislation and have submitted approximately 30 alerts to clients regarding the changes (and we aren't done yet). More to come. 

Let's work together to make state taxes less important, so businesses can thrive.

Will You Have Pie Leftover?

Scenario #1 - you start with a pie. You give some away. Then you give it all away. Then someone comes along and asks for some. They don't care that you gave it all away already. They want some. You scrape the pie pan and give them some. This continues to happen until it feels like you gave 2 pies away.

Scenario #2 - you start with a pie.  You give some away. Then you give what you think is all of it, but somehow you end up with 2 pieces left. No one comes calling. You have pie leftover.

Both scenarios can happen to a company when filing state income tax returns due to the lack of uniformity among states in filing methodologies, income sourcing, and apportionment methods. This year, states are passing legislation that is not only responding to federal tax reform, but also changing each of these areas for some states. 

Companies should monitor state tax legislation and model out the changes to determine how their income tax liability will shift from state to state. 

The question is - will you have pie leftover or will it feel like you have given 2 pies away when you only had one to begin with?

STATE TAX KNOWLEDGE UPDATE (62 ITEMS) - MAY 2, 2018

The following are state tax and business developments I have curated since April 11th, and posted in the LEVERAGE SALT LinkedIn group:

Some of the items may be on the same state/issue/topic, but they are from different sources which may give you a broader perspective to help your company or client.

1. Legislative Session Review: Idaho

2. Legislative Session Review: Arkansas

3. Maryland Legislature Sends Single-Sales Factor Bill to Governor

4. Oklahoma Enacts Marketplace Sales Legislation

5. Oregon Updates IRC Conformity, Repeals Tax Haven Law

6. Oregon Extends Interstate Broadcaster Apportionment Provisions

7. Maine Amends Headquarters Credit, Other Provisions

8. Enacted Oklahoma Marketplace Sales Legislation Detailed

9. Virginia Allows Modified Apportionment Factors for Certain Companies

10. New York Enacts Budget With IRC Conformity, Other Changes

11. Nebraska Updates IRC Conformity

12. Tennessee Allows Financial Asset Managers to Elect Single Receipts Factor Apportionment

13. New Arizona Law Updates State Conformity to Some Provisions of IRC

14. Texas Comptroller Reminds that Tax Amnesty Program will Run from May 1 to June 29 and Provides for Potential Waiver of Penalties and Interest

15. Connecticut Administrative Guidance Discusses Treatment of IRC Sec 965 Federal Repatriation Transition Tax

16. New York 2018-2019 State Budget Bill Addresses Treatment of Some Provisions of the 2017 Federal Tax Reform Act

17. New Oregon Law Updates State Conformity to IRC for Specific Provisions and Extends Sunset Date of Modified Apportionment Regime for Interstate Broadcasters

18. New Alabama Law Requires Certain Marketplace Facilitators to Collect and Remit Tax or Else Adhere to Information Reporting Requirements

19. Oregon Enacts Qualified Business Income Addition

20. Kentucky Enacts Apportionment Formula, Rate, Other Changes

21. Kentucky Broadens Sales Tax Base, Hikes Cigarette Tax, Makes Other Changes

22. Digital Tax Arguments Focus on Role of Congress, Compliance Costs

23. Insight: ‘Wayfair: Covering the Waterfront—Amicus Briefs Supporting Respondents

24. A Brief History of the Biggest State Tax Case in a Generation

25. Rhode Island Discusses Treatment of IRC Sec. 965 Income

26. South Dakota v. Wayfair - TTR Explains What Tax Technology Options Really are Available

27. No Simple Story About Tax Bill’s Impact on States

28. Cap on the State and Local Tax Deduction Likely to Affect States Beyond New York and California

29. State & Local Tax Advisory: The Supreme Court Weighs a New State Tax Nexus Standard, Again | Alston & Bird LLP

30. New Mexico Administrative Hearings Office Issues Timely Opinion Regarding State Taxation of Subpart F Income and Dividends from Foreign Affiliates

31. Oregon Taxpayers Denied Use of MTC’s Apportionment Formula

32. Kentucky Might Require Combined Reporting, Many Tax Changes

33. Virginia Enacts Subtraction for REIT Income

34. The Tax-Savvy Company Restructuring

35. Adopt or adapt? New IRS partnership audit rules affect states

36. Legislative Session Review: Florida

37. New Jersey Permits Dedicated Prepayment of Anticipated Taxes

38. Maryland Phases in Single-Sales Factor Apportionment Formula

39. Legislative Session Review: Nebraska

40. New Arizona Law Allows Some Taxpayers to Bypass OAH Process and Appeal Tax Dispute Directly to Board of Tax Appeals

41. Arizona DOR Issues Notice Regarding Certain Fiduciary Return Filers with IRC Sec 965 Repatriation Income for 2017 Tax Year

42. California FTB Issues Fourth and Final Report to Legislature on Recently Enacted Federal Tax Reforms

43. New Maryland Law Phases in Single-Sales Factor Apportionment for Corporate Income Tax Purposes

44. New Nebraska Law Provides Adjusted Basis Computation for Certain IRC Sec 179 Depreciable Property

45. New Hampshire DOR Administration Issues Report on How 2017 Federal Tax Reforms May Affect State Income Taxation – New Law Revises Effective Dates of Tax Rate Changes Enacted in 2017

46. New York City Memo Explains Deemed Repatriation Income under GTC, BTX, and UBT

47. Pennsylvania DOR Discusses Application of IRC Sec 965 RTT to State CNIT

48. Rhode Island Division of Taxation Provides Guidance on Treatment of IRC Sec 965 Income for Individuals and Pass-through Entities

49. MTC Approves Hearing Officer Report on Apportionment Regulation Amendments

50. Ohio Supreme Court Overturns Reduced NOL Credit

51. THE BEST AND WORST OF SALES TAX ADMINISTRATION

52. Conformity with federal tax reform will result in an estimated state corporate tax base increase of about 12% for the first ten years

53. FY 2019 STATE BUDGET STATUS

54. NCSL: REMOTE SALES TAX COLLECTION ANALYSIS & OPINION

55. Years of work to simplify the collection of remote state sales taxes may soon pay off.

56. Kentucky legislature overrides Governor's veto of tax plan

57. Florida Explains Treatment of Repatriation Income

58. Kentucky Requires Combined Reporting in Tax Reform Bill

59. Pennsylvania Explains Treatment of Repatriation Income

60. Alabama Provides Guidance on IRC Sec. 965 Repatriation Income

61. Kentucky Clarifies Definition of Prewritten Computer Software

62. Kentucky Enacts Combined Reporting

The above represents 'general curating' of state tax developments into one spot. If you still feel overwhelmed by the volume of state tax developments, please consider my 'custom curating' service. Meaning, clients hire LEVERAGE SALT to daily curate state tax developments relating to a specific industry, state(s), tax type and issue. You can make it as granular as you prefer. This allows you to reduce information overload, and only get the information you need to help your clients or company. This service is provided on a fixed-fee or subscription basis. Contact me at strahle@leveragesalt.com.

Wayfair v. South Dakota - What is the Practical Issue?

I just finished reading the transcripts for the Oral Arguments in the Wayfair v. South Dakota (U.S. Supreme Court case). Despite all of the arguments, discussion and debate, one practical, simple matter came into focus - this whole thing is about whether a business (small or large) will have to complete sales tax compliance in 45 states (plus D.C.) or simply the one state it has a physical presence in. Obviously, the facts differ by company as some have a physical presence in several states or all states. But I am talking about those companies who have a physical presence in 1 or a handful of states. If South Dakota wins this case, that company's sales tax compliance burden goes from 1 state to 45 states (plus D.C.). And since most businesses (yes, even brick and mortar businesses) have a website, the sales tax compliance burden will increase on ALL businesses. Does that meet constitutional muster? Does that NOT increase burdens on interstate commerce?

As some of the Justices said - this is not a physical presence problem, this is the state's inability to collect use tax problem. I urge the Court to not transfer the state's problem, and burden Internet commerce. If states can't collect the tax, maybe they should impose a different tax they can collect.

P.S. - I have been reading lots of articles, posts about the case and the Oral Arguments. I have also read all of the briefs. If you would like more resources regarding this issue, check out the LEVERAGE SALT Linkedin group for several resources.