24th Annual
Tuesday & Wednesday, January 27‐28, 2015
Hya Regency Columbus, Columbus, Ohio
Ohio T
ax
Workshop AA
Advanced
: 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
2011.
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.
EMERGING STATE TAX NEXUS ISSUES
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
Calculation
Combined Reporting
Add-back
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
property?
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)
The CAT
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?
Retro-activity?
Attributional nexus?
Independent contractors
Other third parties
Service providers
Accountants and lawyers
3
rd
Party delivery services
Polling Questions - 4
Does a software company have nexus in a State by
shipping its software to customers using a common
carrier?
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
U.S
•
Thus, Foreign Manufacturer has no ECI
Does Foreign Manufacturer have nexus with any state?
U.S.
Company
Foreign
Manufacturer
Jurisdiction - Example – cont’d
Taxpayer may have jurisdiction in states that impose
economic nexus standards, e.g.:
Connecticut
•
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
business
A foreign company's gross income is its ECI
Maine
•
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
U.S.
Company
Foreign
Manufacturer
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
commerce
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
commerce
•
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
Quill
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
parties
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
(2012)
•
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
BIS, LP
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.
2011)
•
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
receipt”
•
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
Treasury
, 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
Revenue
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
•
