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Ohio Tax. Workshop AA. Advanced: Emerging Issues in State Tax Nexus The Most Rapidly Changing Area of Taxation


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24th Annual 

Tuesday & Wednesday, January 27‐28, 2015 

Hya  Regency Columbus, Columbus, Ohio 

Ohio T


Workshop AA


: Emerging Issues

in State Tax Nexus …

The Most Rapidly Changing

Area of Taxation

Wednesday, January 28, 2015

11:00 a.m. to 12:30 p.m.


Biographical Information

Shirley K. Sicilian, Managing Director, KPMG LLP 1801 K Street, NW, Washington, DC 20006

202-533-3466 Fax: 202-379-7731 ssicilian@kpmg.com

Shirley Klenda Sicilian is National Managing Director of State and Local Tax Controversy in KPMG LLP's Washington National Tax office. In this role, Shirley is responsible for supporting KPMG’s network of controversy specialists in every state and coordinating delivery of KPMG controversy services nationwide.

Prior to joining KPMG, Shirley was General Counsel for the Multistate Tax Commission, an intergovernmental agency whose membership includes forty-seven states and the District of Columbia. She previously served as Director of Policy and Research, and then General Counsel, for the Kansas Department of Revenue. Before working in the tax area, Shirley worked in public utility regulation, serving as Chief of Economic Policy and as Assistant General Counsel for the Kansas Corporation Commission. Shirley received the Paull Mines Award for Outstanding Contribution to State Tax Jurisprudence in July of 2013. And State Tax Notes named Shirley as a finalist for its 2013 Person of the Year, citing her as “one of the most influential legal thinkers in the field.”

Shirley has been appointed to serve on a variety of advisory and deliberative boards; is a frequent writer, instructor, and speaker on state tax topics; and has authored several briefs before various State Supreme Courts and the U.S. Supreme Court. Her publications include the corporate income tax chapter for State Business Taxes, a Law Journal Press publication updated semi-annually.

Education, Licenses & Certifications

■ JD, University of Kansas

■ Masters of Economics, University of Kansas

■ BA, University of Kansas

■ Licensed to practice law in: Kansas State and Federal District Courts; United States Court of Appeals for the Tenth Circuit and United States Supreme Court

Christine T. Mesirow, Section Chief, Taxation, Ohio Attorney General Mike DeWine 30 E. Broad St.; 25th Floor, Columbus, OH 43215

614-995-3753 Fax: 866-459-6679 Christine.mesirow@ohioattorneygeneral.gov

Christine has practiced in the area of state and local taxation for more than 25 years, in both the private and public sectors. She began her career in state & local tax as an assistant attorney general in the Taxation Section. Christine then moved to Dallas, where she gained experience in multistate tax issues affecting technology service providers as the state tax counsel for Electronic Data Systems Corp., representing the company in state tax controversies throughout the country. She later was a state & local tax consultant with PricewaterhouseCoopers and was of counsel with Bricker & Eckler LLP. Prior to her current appointment as chief of the tax section, she served as the Chief Legal Counsel for the Ohio Department of Taxation.

Christine’s broad range of experience in both tax controversy and tax administration issues provides her with an understanding of many issues confronted by those who must navigate the sometimes complex legal, policy and business issues challenging government and industry in the administration of and compliance with state tax law. Christine is a graduate of the Ohio State University Moritz College of Law.


Biographical Information

Lori A. Maite, Executive Director, Indirect, S&L Tax, Ernst & Young LLP 41 S. High St., 1100 Huntington Center, Columbus, OH 43215- 614-232-7769 Fax: 866-278-4429 lori.maite@ey.com

Lori Maite is an Executive Director in Ernst & Young’s Columbus Office with 18 years of public

accounting experience, over half of which have been in State and Local Taxation. During the course of her career, Lori has focused upon many aspects of state taxation, including multi-state income and franchise tax planning, credits and incentives projects, sales and use tax planning and technology enhancements, and property tax compliance and appeals negotiations.

Prior to her current role, Lori spent eight years as a Tax Account Leader to some of the Columbus Office’s largest clients, including public, private, and private-equity backed multinational and multi-location companies across a range of diverse industries. In that role, she focused on her clients’ business issues and priorities and how to create alignment across the organization, with particular attention to the tax and human resource consequences and opportunities. Lori often collaborates with various functions across a client’s organization to resolve business and tax issues. Lori’s broad-based focus upon the business operations of her clients uniquely qualifies her as an advisor on both tax and non-tax related matters.

Lori is an Enrolled Agent. She is a graduate of The Ohio State University College of Law. In addition, Lori earned her B.A. in Accounting, summa cum laude, from Capital University. Lori

has served as a lecturer on state tax issues for seminars sponsored by COST, as well as other educational organizations.

Craig B. Fields, Partner; Chair, SALT; Co-Chair, Tax, Morrison & Foerster LLP 1290 Avenue of the Americas New York, NY 10104

cfields@mofo.com 212.468.8193 Fax: 212.903.7833

Craig B. Fields is co-chair of the firm’s Tax Department and is also chair of the firm’s State + Local Tax Group. His practice focuses on litigation and planning relating to state and local tax matters. He has been involved in controversies regarding state and local tax issues before the administrative and judicial systems of jurisdictions throughout the United States as well as having resolved hundreds of non-public record cases around the country. Mr. Fields has also provided advice regarding the potential tax consequences of complex restructurings involving the corporation income (franchise) taxes, the sales and use taxes, and miscellaneous taxes of many jurisdictions.

Mr. Fields is recommended as a leading state tax lawyer by Chambers USA 2012 and 2013. He

is recognized by Legal 500 US 2011 – 2013, and has been consistently ranked in Super Lawyers since 2006. He has been named to State Tax Notes’ “Top 10 Tax Lawyers” list for


A recognized leader on state and local tax issues, Mr. Fields is a frequent author and lecturer, whose work appears in many of the industry’s leading publications. Mr. Fields is a member of the Georgetown Law Center Advisory Board.


Mr. Fields received his J.D. from Duke University School of Law, and his LL.M. in Taxation from New York University. He also graduated from Queens College with a B.A. in Accounting and Economics.



The Most Rapidly Changing Area Of State Taxation

Craig B. Fields, Morrison & Foerster LLP

Lori A. Maite, Ernst & Young LLP

Christine T. Mesirow, Office of Ohio Attorney General

Shirley K. Sicilian, KPMG LLP


Bringing Income into the Apportionment


Combined Reporting


Transfer Pricing Adjustments

Business Purpose/Economic Substance

Sham Transaction


Nexus may be Created Through


An entity’s own activities

The activities of an affiliate

The activities of a third-party


Due Process – the Recent Past

US Supreme Court – State Tax Due Process Jurisprudence

Miller Brothers,

347 U.S. 340 (1954)

Due process requires some definite link, some minimum connection, between a

state and the person, property, or transaction it seeks to tax.”

Quill Corp. v. North Dakota

, 504 U.S. 298 (1992)

Due process and commerce clause nexus are “closely related” and “not always

necessary to distinguish.”

“Unlike the commerce clause's substantial nexus requirement, minimum contacts

for due process purposes may be established even where a prospective

taxpayer has no physical presence in the taxing state.”

Next 20 years of State Tax Cases

Geoffrey v. South Carolina,

313 S.C. 15 (1993)

West Virginia v. MBNA,

220 W.Va. 163 (2006)


Re-emergence of Due Process

Recent US Supreme Court Cases, Non-Tax

McIntyre Machinery v. Nicastro,

131 S.Ct. 2780 (2011)

Goodyear v. Brown,

131 S.Ct. 2846 (2011)

Daimler AG v. Bauman

, 134 S. Ct. 746 (2014)

Walden v. Fiore

, 134 S. Ct. 1115 (2014)

State Tax Cases

Griffith v. ConAgra Brands, Inc.

, 229 W.Va. 190 (2012)

Scioto Ins. Co. v. Okla. Tax Comm'n,

279 P.3d 782 (2012)

BIS LP, Inc. v. DOT,

WL 3667622 (N.J. Super. A.D. 2011)

Village Super Market v. DOT

, 27 N.J. Tax Ct. 394 (2013)


Polling Question – 1

Do you think significant use of a corporation’s

intangible property in a state by an affiliate should

give rise to income tax nexus for the owner of that



Polling Questions - 2

Does a sports figure that has his or her picture on

boxes of cereal sold in a State have a sufficient

nexus with the State to be subject to tax if the

sports figure is paid a fee based on the number of

boxes of cereal sold?

Does the answer change if the sports figure is instead

paid a flat fee for having his or her picture on the

boxes of cereal?


Re-emergence of Due Process

Unitary Businesses

Gore Enterprise Holdings v. Comptroller

, 87 A.3d 1263 (Md.2014).

Village Super Market v. DOT

, 27 N.J. Tax Ct. 394 (2013)

Pass-through Entities

Swart v. Cal. FTB,

Cal. Super. Ct. Case No. 13CECG0217

“Sham Nexus”

Allied Domecq v. Comm’r,

10 N.E.3d 178 (Mass. App. Ct. 2014)


L.L. Bean v. Levin,

Case No. 2010-2853 (Ohio BTA 2014)

Federal cases

Red Earth LLC v. U.S.,

657 F.3d 138 (2011)


Polling Question – 3

Do you think a unitary business should be

considered as a single economic enterprise for due

process nexus purposes?


On the Horizon

Re-emergence of nexus over the person, as distinct

from nexus over the transaction?


Attributional nexus?

Independent contractors

Other third parties

Service providers

Accountants and lawyers



Party delivery services


Polling Questions - 4

Does a software company have nexus in a State by

shipping its software to customers using a common


Does the answer change if the company delivering the

product is a contract carrier?

Does the answer change if the software company itself


Practical Considerations

Implications of new technology

Changing ways of doing business

Modern-day employees

Working from home: regularly? Weekends?

Business travel: how much is enough?

Unemployment filings

Employees on “vacation”

Is it worth a challenge? Consider the administrative


Polling Questions - 5

Does a company have a sufficient nexus with a State to

be subject to tax if it has a single employee attend a

trade show for three days during a year?

Does the answer change if the company also displays its

products at the trade show?

Does the answer change if the company also takes orders

for its products at the trade show and ships the product from

its headquarters outside of the State?


Polling Question – 6

Do you think a sole tele-worker creates sufficient


Crystal Ball

Does the type of tax at issue matter?

Will economic nexus be the standard?

Will/should movie stars, authors, and sports figures really be

subject to tax by every jurisdiction?

Where will the lines be drawn?

Administrative costs to states and taxpayers?

More VDAs?


State Jurisdiction for Foreign Entities

States do not conform to U.S. Tax Treaties

States generally require a taxpayer to file a return if it

has employees or property in state.

Some states impose economic nexus

“Use” of intangible (e.g., patent) in state

Specified amount of sales to customers in state

Specified amount of property in state

Foreign entities may be surprised to learn they have a

state tax filing obligation even if they do not file federal

income tax returns


Jurisdiction - Example 1

Foreign Manufacturer sells goods to a company

headquartered in NY

Goods shipped via common carrier to U.S. Company’s

distribution centers throughout the United States

Foreign Manufacturer has no permanent establishment in the


Thus, Foreign Manufacturer has no ECI

Does Foreign Manufacturer have nexus with any state?






Jurisdiction - Example – cont’d

Taxpayer may have jurisdiction in states that impose

economic nexus standards, e.g.:


Deemed to have nexus if greater than $500,000 in receipts

attributable to Connecticut sources

Legislation limits the application to foreign companies

Economic nexus provisions do not apply to a foreign corporation that

has no income effectively connected with a United States trade or


A foreign company's gross income is its ECI


Taxpayers with economic nexus in the state are subject to tax


Jurisdiction - Example – cont’d

Foreign Manufacturer sells goods to a company headquartered in NY

Goods shipped via common carrier to U.S. Company’s distribution centers

throughout the United States

Foreign Manufacturer has no permanent establishment in the U.S. but employees

regularly visit U.S. company to solicit sales

Is Foreign Manufacturer protected by U.S. PL 86-272






Jurisdiction - Example – cont’d

By its terms, U.S. PL 86-272 applies to “interstate” commerce but not to

“international” commerce.

A number of states have announced that they will apply PL 86-272 to

transactions in foreign commerce.

E.g., Alabama, Illinois, Kentucky, Michigan

Some states specifically do not apply PL 86-272 protections to foreign


California—applies only to U.S. states and Puerto Rico

MTC guidelines—applies only to U.S. commerce, but provides

language for states to use if they want to apply it to foreign


States that adopted the MTC guidelines without revision

(i.e., do not specifically exempt foreign commerce) include:

Arkansas, Colorado, Hawaii, Idaho, Louisiana, Montana, New


Nexus—PL 86-272 Issues

Issues may arise in some states if:

Foreign company uses company vehicles and personnel to

deliver goods

Particularly if they pick up returned/damaged goods

Foreign company conducts non-solicitation activities in the

state (even if through third-parties), such as

Training on use of products

Repair services

Investigating credit

Repossessing goods


Other State Tax Issues

Even if not subject to income taxes, foreign

taxpayers may be subject to non-income taxes.

Net-worth based taxes

Minimum taxes

Employment taxes

Property taxes

Sales/use taxes


KFC Corp. v. Iowa DOR

KFC Corp. v. Iowa DOR

, 792 N.W. 2d 308 (2010)

Iowa’s high court upheld an assessment against out-of-state

taxpayer s that licensed intellectual property to certain in-state

third party franchisees

Under Iowa law, corporate income tax is imposed on corporations

deriving income from intangible property that becomes an integral

part of some business activity occurring regularly in state

Assessment did not violate dormant Commerce Clause

Use of Intangibles in-state was the “functional equivalent” of a

physical presence

In addition, in Iowa court’s opinion, U.S. Supreme Court would not

extend Quill to income based taxes


not based on “logic” but based solely on stare decisis


Griffith v. ConAgra Brands, Inc.

Griffith v. ConAgra Brands Inc.

, 229 W.Va. 190 (2012)

Issue was whether a taxpayer that licensed intangibles was “doing

business” in the state

Taxpayer licensed grocery-related brand names to related and unrelated


All of the manufacturing occurred outside of West Virginia

Taxpayer had no control over how marks were used or where products were

distributed, but products bearing its marks and brand names were

eventually sold in West Virginia stores

Court held that the taxpayer did not have Due Process or Commerce

Clause nexus with West Virginia

Did not engage in any solicitation activities in-state and did not sell any

products directly to West Virginia retailers or wholesalers


Scioto Ins. Co. v. Okla. Tax Comm’n

Scioto Ins. Co. v. Okla. Tax Comm’n

, 280 P.3d 782


Issue before the court was whether the Commission could tax an

out-of-state insurance company that licensed intangibles to an

Oklahoma taxpayer that subsequently sublicensed the marks to

Oklahoma restaurants

Insurance company did not receive royalty income directly from

Oklahoma restaurants

Sub-licensor deducted amounts paid to the insurance company on its

Oklahoma returns

Court held that Oklahoma could not tax the income derived from

a contract entered into outside of Oklahoma and no part of which

was performed in the state

Furthermore, the insurance company was entitled to royalty income

regardless of whether the Oklahoma restaurants actually paid for

the use of the marks


Village Super Market v. DOT

Village Super Market vs. DOT, 27

N.J. Tax Ct. 394 (2013)

A corporate partner that owned a limited partnership interest in a

partnership doing business in New Jersey, was subject to New Jersey

Corporation Business Tax (CBT)

The partner operated a single grocery store in Pennsylvania; the

limited partnership operated a number of grocery stores in New

Jersey under the same name

The entities were all interrelated and largely controlled by

members of the same family

The court distinguished


and held that the corporate partner had

New Jersey nexus

Holding appeared to be based on integration between the entities

and the presence of “agents” in New Jersey controlling and

managing the partner’s affairs from their New Jersey offices


BIS LP, Inc. v. DOT

BIS LP, Inc. v. DOT

, WL 3667622 (N.J. Super. A.D.


Corporate limited partner that owned a 99% interest in a

partnership doing business in New Jersey was not subject to

Corporation Business Tax

The partnership housed the taxpayer’s former banking solutions

Court held that taxpayer did not meet criteria outlined in “doing

business” regulation

There was no functional integration or unitary relationship between

partnership and corporate partner

Also, was not clear that partnership distribution was a “business


Case was remanded to determine if the taxpayer, or the


Swart Enterprises v. Cal. FTB

Swart Enterprises v. Cal. FTB

, Cal. Super. Ct. Case

No. 13CECG02171

Case involves issue whether a corporate taxpayer is doing

business in California and subject to minimum tax solely through

its ownership interest in a California limited liability company.


Gore Enterprise Holdings, Inc. v. Comptroller

of the Treasury

Gore Enterprise Holdings, Inc. v. Comptroller of the


, 87 A.3d 1263 (Md. 2014)

The Maryland Court of Appeals ruled that two out-of-state

subsidiaries had Maryland nexus as they did not have economic

substance as separate business entities apart from their parent

that did business, in part, in Maryland

The court clarified that the fact that the entities were all engaged in

a unitary business did not confer nexus on the out-of-state

subsidiaries, but was merely a factor to consider in determining

whether the entities had substance

It was proper for the Comptroller to apply the parent’s entire

apportionment factor (i.e., property, payroll and sales factors) to

the subsidiaries’ incomes

On their own, the subsidiaries had little or no Maryland


In re Washington Mutual

In re Washington Mutual

, 485 B.R. 510 Bkrtpy. D. Del., Case No.

08-12229 (2012)

A bankruptcy judge was asked to determine whether the Parent company of

a group of banks was jointly and severally liable for tax on income earned

by consolidated group members

Parent had no property, payroll or income directly from in-state sources

Only income related to Oregon was the receipt of dividends from subsidiaries

operating in Oregon

Judge concluded that both the Due Process and Commerce Clauses precluded

the Department from holding the parent jointly and severally liable for the

tax owed by its subsidiaries

Notably, the Parent earned no income from allowing the subsidiaries to use its

marks and the income the Department was seeking to tax was not the Parent’s

income, but was income earned by the subsidiaries

Holding the Parent liable for the corporate excise tax of its subsidiaries merely

because it allowed the free use of its trademarks and received a dividend would

“deeply burden interstate commerce”


Allied Domecq Spirits & Wines USA v. Comm’r of


Allied Domecq Spirits & Wines v. Comm’r of Revenue

, 10

N.E.3d 178 (Mass. App. Ct. 2014)

Activities undertaken to establish nexus for a foreign parent were disregarded under the sham

transaction doctrine

Canadian-based parent of a U.S. subsidiary group transferred employees of certain

Massachusetts subsidiaries to its payroll, and leased office space at an affiliate’s

Massachusetts location to house the transferred employees

After the transfers, the Parent was included in taxpayer’s Massachusetts combined group and

the Parent’s losses were used to offset the group’s income

In reaching its decision, court heavily relied on internal communications indicating that the

reorganization was intended to reduce Massachusetts tax liability

Also, the court found it significant that there was no change in overall management or for the

purportedly transferred employees

In affirming the Board’s decision, the Appeals Court concluded that tax avoidance was the


L.L. Bean, Inc. v. Levin

L.L. Bean, Inc. v. Levin

, Case No. 2010-2853 (Ohio BTA

Mar. 6, 2014)

Department issued CAT assessments against catalog and Internet

seller of outdoor gear based on having receipts attributed to

Ohio customer

Taxpayer argued that the CAT’s factor-presence nexus standard

was unconstitutional as it lacked any physical presence in Ohio

After the Tax Commissioner upheld the assessment, the Board of

Tax Appeals affirmed

Board could not address constitutional claims; thus, under the

language of the factor-presence nexus statute, LL Bean had nexus

with Ohio


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