State Income Tax Base Calculation: Complex Issues in Income Modification

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State Income Tax Base Calculation:

Complex Issues in Income Modification

Reporting for Multi-State Companies to Minimize Tax and Maximize Deductions

Today’s faculty features:

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WEDNESDAY, DECEMBER 18, 2013

Presenting a live 110-minute teleconference with interactive Q&A

John Daly, Tax Manager, WithumSmith+Brown, Princeton, N.J.

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State Income Tax Base Calculation:

Complex Issues in Income

Modification

John Daly, WS+B

jdaly@withum.com

Dec. 18, 2013

Jeffrey S. Reed, Mayer Brown

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Today’s Program

Introduction and Overview

[Jeffrey Reed]

Conformity and Non-Conformity to the Federal Income Tax Base

[Jeffrey Reed]

State Statutes Designed to Curb State Tax Planning

[Jeffrey Reed]

Apportionable or Allocable Income [Jeffrey Reed] Types of Reporting [Jeffrey Reed] Apportionment Issues [John Daly] Slide 7 – Slide 9 Slide 10 – Slide 17 Slide 18 – Slide 21 Slide 22 – Slide 28 Slide 29 – Slide 34 Slides 35 - Slides 79

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Mayer Brown is a global legal services provider comprising legal practices that are separate entities (the "Mayer Brown Practices"). The Mayer Brown Practices are: Mayer Brown LLP and Mayer Brown Europe-Brussels LLP both limited liability partnerships established in Illinois USA; Mayer Brown International LLP, a limited liability partnership incorporated in England and Wales (authorized and regulated by the Solicitors Regulation Authority and registered in England and Wales number OC 303359); Mayer Brown, a SELAS established in France; Mayer Brown JSM, a Hong Kong partnership and its associated entities in Asia; and Tauil & Chequer Advogados, a Brazilian law partnership with which Mayer Brown is associated. "Mayer Brown" and the Mayer Brown logo are the trademarks of the Mayer Brown Practices in their respective jurisdictions.

Calculating the State Income Tax

Base

Strafford Publications

Jeffrey S Reed (212) 506-2104 jreed@mayerbrown.com December 18, 2013

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Introduction

Overview of State Income Tax Computation

Conformity and Non-Conformity to the Federal Income

Tax Base

State Statutes Designed to Curb State Tax Planning

Combined Reporting

Apportionable and Allocable Income

Partnerships and Apportionment

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Overview of State Income Tax Computation

Typical approach

– Start with federal income tax base. – Make state modifications to the base.

– Determine what income is apportionable / allocable.

States with a gross receipts base

– Ohio, Washington and Texas

Statutory construction

– State tax law can “depart from Federal tax law.”

– States can “take a different path from that of the Federal

government” with respect to taxation.

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Conformity and Non-Conformity to

the Federal Income Tax Base

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Federal Income Tax Base

Different Approaches

– Incorporate by reference (Federal Income Tax Base for the

taxable year).

– Static base (federal income tax code as of a certain year).

Generally, conformity is to income only

– No conformity to parts of the IRC unrelated to “income,” for

example withholding.

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Dividends

Different approaches.

– Exclude all dividends from the tax base (Kentucky). – All dividends from subsidiaries excludable (New York). – Foreign source dividends excluded (Georgia).

Litigation

– Some states limit the DRD to income already taxed in the state

or only to dividends received by corporations taxable in the state.

Farmer Brothers (California).

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Deductions Related to Income Excluded from the Tax

Base

Examples

– FL disallows expenses attributable to foreign source dividends. – GA disallows expenses relating to federal obligations.

– New York disallows interest deductions attributable to

subsidiary capital.

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Net Operating Losses

Varying approaches

– Some states do not let you carry back a loss.

– Some states allow a carryforward that differs from the federal

carryforward.

Types of conformity

– Conformity based on amount (NOL = line from 1120 form). – “In the same manner” as the NOL deduction.

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Net Operating Losses – Change in Ownership

IRC 381 + 382 provide rules for transferring tax attributes

in a transaction.

– Some states conform to these sections.

– Other states do not allow NOLs to transfer in, for example, a

merger. (e.g., in Massachusetts case law states that the NOLs of the corporation absorbed in the merger are lost but the NOLs of the surviving corporation are retained); Macy’s East v.

Commissioner.

– North Carolina (NELs and Libson Shops/COBE doctrine).

– Net operating losses sustained by a “taxpayer” can be carried

forward. Conflicting litigation.

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Consolidated Return Regulations

Range of issues

– Deferred intercompany transactions – Inventory adjustments

– Disposition of stock of a subsidiary

– Basis adjustments – related to 338(h)(10) conformity – Charitable Contribution Deductions + MA FMR case

State Group Different than Federal Group

– What if only one of the two relevant group members is in the

state?

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State Statutes Designed to Curb State

Tax Planning

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State Statutes Designed to Curb State Tax Planning

Overview

– Intercompany deductions

– Intangible Holding Company Structures – REIT Structures

– Captive Insurance Company Structures – 80/20 Planning

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Addback Statutes

These statutes require that taxpayers “add back” to

income expense deductions relating to certain expenses

paid to a “related member.”

– In many states intangible expenses only.

– In some states interest expenses or management expenses.

Exceptions:

– Subject to Tax – Conduit

– Reasonableness

– Foreign Country with Treaty

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Captive REIT Statutes

Background

Approaches

– Combine the REIT and the recipient of the dividends. – Deny the DPD.

– Eliminate the DRD.

– May attempt to assert nexus over the dividend recipient.

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Basic Distinction

Apportionable Income

– Apportioned using the state’s apportionment formula.

Allocable Income

– Attributed to source of income.

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Business Income or Nonbusiness Income

Business income

– Apportionable

– In some states all income is business income within

constitutional limits.

– UDITPA: “income arising from transactions and activity in the

regular course of the taxpayer’s trade or business and includes income from tangible and intangible property if the acquisition, management, and disposition of the property constitute

integral parts of the taxpayer’s regular trade or business operations.”

Nonbusiness income - allocable

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Business Income – Cessation of a Business

Overview of Fact Pattern

Case Law

– Transactional Test – Arose in Regular Course of the Taxpayer’s

Trade or Business (frequent, regular).

– Functional Test – Property Sold used in the Taxpayer’s Trade or

Business.

Recent Trends

– Arizona First Data case.

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Unitary and Non-Unitary Income Distinction

Unitary Income

– SCOTUS: “the linchpin of apportionability is the unitary business

principle.”

– Constitutional (non-statutory) concept.

– Apportionable, can be included in the tax base. – Serves an Operational Function.

Non-Unitary Income

– Allocable.

– Serves an Investment Function.

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Unitary Business Principle

There must be a minimal connection between the state

and the income the state is attempting to tax.

Types of unitary

– Is a division/entity unitary with the taxpayer? – Is an asset unitary with the taxpayer’s business?

Unitary factors

– “Flow of value.”

– Vertical integration, horizonal integration .

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Combined Reporting – Approaches

Separate Entity Reporting

Federal Consolidated Reporting

Nexus only Consolidated Reporting

Mandatory Unitary Combined Reporting

“Forced Combination” or Combination Based on

Distortion

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Mandatory Unitary Combined Reporting

Control Requirement

Unitary Requirement

80/20 Companies Often Out

20/80 Companies Sometimes In

Water’s Edge v. Worldwide

Companies in Foreign “Tax Havens” Sometimes included

in the Group

Recent trend (DC, MA, etc.)

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Forced Combination and Decombination

States that have forced combination can pull a company

into a combined return if there is “distortion” or to

“reflect the true earnings” of the corporations.

Examples of states that allow for forced combination

– Indiana – New York – North Carolina – South Carolina

Decombination

IT USA 32

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Separate Entity Reporting vs. Combined Reporting –

Tax Computation

Separate entity reporting

– Run the numbers on an entity-by-entity basis.

Combined reporting

– Treat all the entities in the group as “one taxpayer” and run the

computations (including apportionment) at the group level.

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WithumSmith+Brown, PC | Certified Public Accountants and Consultants | www.withum.com

Presented by:

John Daly

WSB SALT

Income Apportionment for

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STATES LACKING A MAJOR TAX AND RANK:

No individual income tax: AK(#4), FL(#5), NV(#3), SD(#2),

TX(#11), TN (TN Income tax on interest and dividends only)

(#15), WA(#6), & WY(#1) .

No corporate income tax: NV(#3), SD(#2) (SD corp income tax

on banks only), WA(#6), & WY(#1).

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WHAT IS BUSINESS INCOME:

UDITPA 1957: “Business income” means income arising from

transactions and activity in the regular course of the taxpayer’s

trade or business and includes income from tangible and

intangible property if the acquisition, management, and

disposition of the property constitute integral parts of the

taxpayer’s regular trade or business operations.

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STATE CORP APPORTIONMENT CALCULATIONS

Business income is apportioned among jurisdictions by use of a

formula. Nonbusiness income is {generally} specifically

assigned or allocated.

Apportionment Formulas: Three Factor; Double Weighted Sales

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STATE APPORTIONMENT CALCULATIONS

Most states use some version of the Payroll/ Property/Sales

apportionment calculation.

Equal sales weighting: AK, DE, HI, KS, MO, MT, NM, ND, RI.

Sales only: CA (2013), CO, CT, GA, IA, IL, IN, ME, MI, MN (2014 SSF; 2013 SF

is 96%) NE, NY, OR, PA (2013), SC, TX, UT, WI. NJ started phase in 2012.

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PROPERTY FACTOR = FED

Most states use original cost, while some use NBV.

NYC does not include LI cost/AD in property (Provided the

improvement reverts to the lessor at the end of the

lease).

Mobile property (e.g. busses, trucks, etc.) is “typically”

valued by some ratio method. Rules vary by state (e.g.

percentage of use or mileage ratio).

Rent includes amounts paid for TPP and real property.

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PAYROLL FACTOR

Use gross (SUI) compensation paid to individuals treated as

employees for FICA purposes.

Compensation to employees & officers must be accounted for

separately for NYC purposes.

Payroll is apportioned based on where employee actually works,

not where the employee lives.

States generally do not include amounts paid to independent

contractors in factor.

Few states have addressed the inclusion of amounts paid to

“leased employees” in the payroll factor, but where it has been

addressed the states/courts have concluded they should be

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MTC REG IV.14 (UDITPA ALSO): PAYROLL IS SOURCED TO A STATE

IF……

Employee’s service is performed entirely in state, or

Service is performed within and without, but the service

performed without is incidental, or

Service is performed within and without, and

a) employee’s base of operations is there, or

b) no base of operations in any state in which part of the services

is performed, but the place from which the service is directed or

controlled is in the state, or

c) If the base of operations, or the place from which the service is

directed or controlled is not in any state in which a portion of

the service is performed, but the employee’s residence is in the

state.

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PAYROLL SOURCING EXAMPLE 1

Employee’s service is performed partly in NY, NJ, CT,

and PA.

Employee lives in CT.

Employees office where his management is located

is in NJ. He also works here approx 50% of the

time.

How is his payroll sourced for Payroll apportionment

purposes (to one state or four or…..)?

Where does his employer pay SUI on this employee

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PAYROLL SOURCING EXAMPLE 2

Employee’s service is performed partly in NJ, and partly in PA.

Employee lives in CT.

Employees office where his management is located is in NJ

where he works Jan-Sept.

He works in PA Oct-Dec.

How is his payroll sourced for Payroll apportionment purposes

(to one state or three or…..)?

Where does his employer pay SUI on this employee (to one

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NYC CORP PAYROLL SOURCING

Employees within New York City (numerator of the

payroll factor) include all employees regularly connected

with or working out of an office or other place of

business maintained in New York City, regardless of

where their services were performed.

However, if part of the payroll was paid to employees

attached to a New York City office who performed a

substantial part of their services outside the city, the

department may permit the factor to be computed on the

basis of the amount of compensation paid for services

actually rendered within and without the city.

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NYC PAYROLL SOURCING

For NYC, when the payroll factor is to be computed on the basis of

the amount of compensation paid for services performed within

NYC, the amount treated as compensation for services performed

within the City will be deemed to be:

(1)

in the case of an employee whose compensation depended directly

on the volume of business secured by him, such as a salesman on a

commission basis, the amount received by him for the business

attributable to his efforts within NYC will be NYC payroll;

(2) i

n the case of an employee whose compensation depended on other

results achieved the proportion of the total compensation which the

value of his services within NYC bears to the value of all his services;

and

(3)

in the case of an employee compensated on a time basis, the

proportion of the total amount received by him which the working time

within NYC bears to the total working time.

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CORPORATE TAXPAYER RECEIPTS

SOURCING

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SALES: UDITPA (SECTION 1(G)) AND THE MTC (REGULATION IV.15(B)): SALES ARE?

All gross receipts generated by the taxpayer in the regular

course of business.

Sales of tangible personal property.

Services.

Rental income.

Royalties.

Receipts and net gains from sales of business assets

(Often conditional, e.g. not if distortive).

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TANGIBLE PERSONAL PROPERTY (TPP) SALES?

Goods manufactured and sold.

Goods purchased and resold.

Destination sourcing: Sale sourced to location where customer takes possession.

Invoice ship to address typically accepted by states.

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TPP SALES SOURCING EXAMPLES FOR CORPS

ABC Appliances, Inc. ships an air conditioner from its NJ

warehouse to NY in its own truck. State ? sale.

ABC Appliances, Inc. ships an air conditioner from its NJ

warehouse to NY via common carrier. State ? sale.

ABC Appliances, Inc. sells an air conditioner in its NJ store and the

NY customer leaves with the unit and brings it back to his NY

apartment. State ? sale.

ABC Appliances, Inc. (a NJ based internet seller) sells an air

conditioner via its website and the unit is shipped from ABC’s 3

rd

party supplier in Delaware to its customer in MD. If ABC has nexus

in MD it is a MD sale. If ABC (Corp) has no nexus in MD, it will be a

NOWHERE sale.

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NEW JERSEY’S

THROW OUT RULE

For Privilege Periods beginning on or

after July 1, 2010, the regular place of

business rule gone for corporations.

Enacted in 2013, but effective for 2012,

the regular place of business rule no

longer applies to NJ partnerships.

In NJ, both corp and unincorporated

businesses with one location only in NJ

can apportion.

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NOWHERE SALES EXAMPLE

A manufacturer of door mats is located in Newark, NJ.

Manufacturer has nexus in NJ, NY, and TX

Manufacturer ships door mats via common carrier from

facility in Newark to 7 other states.

If only 45% of his sales are to customers in NY, NJ, and

TX, this manufacturer will pay state income tax on less

than 50% of his taxable income.

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THROWBACK RULE

Throwback: Goods are thrown back into the numerator of

a ship from state if there is no nexus in ship to state.

Most effective tool states have to counter black hole

sales.

Many states for example, CA, IL, KS, MA, MI, MO, & WI

have throwback rules.

States like FL, GA, NY, NJ, PA do not have a throwback

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NEW JERSEY CBT SINGLE SALES FACTOR

For privilege periods that began in 2012, sales factor

counts as 70% of the apportionment calculation.

For priv. periods beginning during 2013 it will account for

90%.

For priv. periods beginning in 2014, and thereafter, NJ

will be 100% SSF.

Who benefits? NJ companies or companies with a heavy

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SERVICE RECEIPTS

Many states source service receipts based on UDITPA’s Costs of

Performance (COP) rules.

“Costs of performance” means direct costs determined in a

manner consistent with generally accepted accounting principles.

Include payments to Indep. Contractors.

Rule states, a) Income producing activity is in the state where

performance occurs. b) If performance for a single business

activity occurs partially inside and partially outside the state, the

sale is sourced to the state where the largest amount of direct

costs were incurred.

States where lesser amounts of costs of performance occur are

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COP ALTERNATIVES 1

Market based approach mimics destination sourcing with TPP

sales.

Sales are sourced to the location of the customer (recipient of

the service) CA (2011), GA, IL, IA, ME, MI, MN, OH, UT, WI.

Market based apportionment helps to make nowhere sales

possible.

Example: Home state is a market state, customer is located in

a performance based appt. state.

Tax planning opportunity? Neither state wants the sale.

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COP ALTERNATIVES 2

Allocate the sale of a service performed in multiple

jurisdictions by ratio of costs of performance, or amount

of time spent, or “some other reasonable method.”

E.g. New Jersey & New York….

Texas uses the wording, ”fair value of the services…

rendered.”

Each method designed with goal of sourcing service

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NEW JERSEY SERVICE PROVIDER SOURCING EXAMPLE (RESEARCH CORP)

50% of costs (Staff) incurred in NJ to provide services.

25% of costs (Staff) incurred in PA (COP) to provide services. Employee

home offices.

25% of costs (President & founder) incurred in VA (COP) to provide

services. Worked from home.

One office located in N.J.

$1,000. Total Sales. 45% of Customers in NJ , 35% in PA, 20% in VA.

In 2010, 100% of sales sourced to N.J. (Throwout/Regular Place of

Business)

In 2011, 50% of sales sourced to N.J. (Throwout/Reg Pl. Bus. ended)

In 2011, 60% of income sourced to N.J. (Full 4 factor calc)

In 2014, 45% of income sourced to N.J. (SSF phased in) & PA 35% (SSF

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NJ DRAFT SERVICE ALLOCATION REGS

“The Division is proposing amendments to N.J.A.C. 18:7-8.10,

Receipts, compensation for services performed in the State,

allocation for certain special industries.”

“A new subsection (b) is added to require that in determining

whether services are performed in the State, a taxpayer shall

include in the numerator of the receipts fraction receipts

derived from customers within this State.”

This proposed regulation was put out by the state for public

comment in June-July of 2012.

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California Major Changes

• For 2011 & 2012, CA businesses (corps, pshps, etc.),

other than those deriving > 50% of receipts from

agriculture, financial activities, & extractive businesses could make an irrevocable election to apportion using

SSF.

• For 2011 & 2012, sales of other than sales of

TPP (services), were sourced according to the costs of performance approach if SSF is

NOT elected .

• For 2011 & 2012, sales of other than sales of

TPP (services), were sourced according to the market based approach (where the benefit is received), only when SSF is

elected (Code Sec 25136).

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California Major Changes

Beginning on or after January 1, 2013, most

businesses must apportion using SSF (Prop

39 2012).

Beginning on or after January 1, 2013, Sales

of services are in California to the extent the

purchaser receives the benefit of the services

in California. No election required.

In 2013, businesses that derive more than 50% of their gross receipts

from agriculture, extractive business, savings and loans, or banks and

financial activities will continue to use equally-weighted 3-factor

apportionment formula and source using COP.

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PA APPORTIONMENT

In 2013, PA goes to the single sales factor for corps.

The also state adopts “market-based” sourcing for the Corporate

Net Income Tax sales apportionment factor with regard to the

sale of services. Such sales will be sourced to where the benefit is

being derived by the customer. The change is effective January 1,

2014. Sales of intangibles will continue to be sourced based upon

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PARTNERSHIPS

California: Partnership Sales Allocation Rules:

For taxable years beginning on or after January 1, 2013,

partnership income is sourced to California using Single

Sales Factor, and sales of services are in California to the

extent the purchaser received the benefit of the services

(Market State Method)

in California.

Before 2013, the use of a four-factor formula consisting of

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PARTNERSHIPS

Delaware: Partnership Sales Allocation Rules:

Services are sourced in Delaware to the

location where the

services were performed

.

Washington DC: Partnership Sales Allocation Rules:

Service income is considered occurring in DC if the income

producing activity or service is performed:

In DC; or

Based on the

Costs of Performance Method

, the proportion

of the income-producing activity or service performed in DC is

greater than that performed in any other jurisdiction, based on

performance cost.

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PARTNERSHIPS

Maryland: Partnership Sales Allocation Rules:

Gross receipts from contracting or service-related

activities shall be included in the numerator

if the

receipts are derived from customers within this

State.

Example 1: An attorney, a partner in law firm A located in the

District of Columbia, renders legal advice to a domiciliary of

Maryland. Assuming sufficient nexus between the law firm

and Maryland so as to require the filing of a Maryland income

tax return, the fee earned from the service rendered to the

Maryland domiciliary is included in the numerator of A's

Maryland sales factor.

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MI PARTNERSHIPS VS MI CORPS

Michigan: Partnership Sales Allocation Rules:

2012 Pshp Return & Corp CIT Return apportionment are based on SSF.

Pshps do not file a return in MI in 2012 unless doing a composite filing.

MI Pshps 2012: Sales, other than sales of tangible personal property, are in this

state under

Costs of Performance

if:

The income-producing activity is performed in this state; or

The income-producing activity is performed both in and outside this state

and a greater proportion of the income-producing activity is performed in

this state than outside this state, based on costs of performance

MI CIT: All receipts from the performance of services are included in the

numerator if the recipient of the services receives all of the benefit of the

services in MI.

If the recipient of the services receives some of the benefit of the services in

MI, the receipts are included in the numerator of the apportionment factor in

proportion to the extent that the recipient receives benefit of the services in MI.

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PARTNERSHIPS

New Jersey Partnership Sales Allocation Rules:

The amount of

service income to be allocated to NJ by a

partnership

includes

services performed by partners,

employees, agents, agencies or independent contractors

of the business situated at or sent out from, the offices

of the business (or its agencies) located in New Jersey.

For example:

If a salesperson working out of the New Jersey office covers the states of

New Jersey, New York and Pennsylvania, all sales made are to be

allocated to New Jersey and reported on Line 2a.

If a lawyer working out of the New Jersey office travels to NY to defend

his client in court, for NJ pshp sourcing purposes 100% of that revenue

s/b sourced to NJ.

NY partnership sourcing mimics NJ’s. NY would also view the revenue

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NJ PARTNERSHIPS

Prior to 2012, the NJ 1065 instructions read as follows: ”if the

business has no regular place of business outside New Jersey,

it may not allocate income

Posted 03/13/13 on:

http://www.state.nj.us/treasury/taxation/2013NRA_Notice.sht

ml

: “An unincorporated business which carries on its business

activities both inside and outside New Jersey, may allocate its

business income to determine the amount from New Jersey

sources. The business is not required to maintain a regular

place of business outside of New Jersey in order to allocate its

income”

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NJ CORPORATE SALES ALLOCATION RULES

Services performed both within and outside the state are

sourced based upon the cost of performance, the amount

of time spent in the performance of these services or

some other reasonable method which reflects the trade or

business and economic realities underlying the generation

of the compensation for such services and without regard

for where the amounts were payable or where they

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NJ-1065 UNDER WITHHOLDING PROBLEM

The NJ-1065 Part 100 NJ

Nonresident Non-corporate

Partner Tax is calculated in the

NJ-1065 partners directory which uses

the NJ “corporate allocation

factor.”

If the corporate allocation factor is

smaller than the partnership NJ

Business allocation percentage

from schedule NJ-NR-A, as it often

is, the nonresident partners will be

under withheld.

Solution?

You must override the corporate

allocation factor in the partner’s

directory in tax software (e.g. Fast

Tax).

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CORPORATE PARTNERS

When the corporate partner and the partnership are not part of a

single unitary business, separate accounting apportionment

should be used to arrive at corporate income.

If the entities are part of a single unitary business flow through

apportionment should be used with respect to the incomes of the

two entities.

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UNITARY CORPORATE PARTNERS

Facts that suggest a corporation and partnership are part of a

unitary business are as follows:

Substantial intercompany- partnership transactions;

The partnership interest is the only or the most substantial asset of

the corporation;

The partnership interest produces all or most of the income of the

corporation;

The corporation and the partnership are in the same line of business;

There is substantial overlapping of employees and offices; and/or

There is sharing of operational facilities, technology and/or know-how.

BIS LP?

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CORPORATE PARTNERS

Separate accounting apportionment means:

The corporation's distributive share of the partnership's business

income

would be apportioned to New Jersey by computing the

apportionment factor by only taking into account the corporate

partner's share of the receipts, payroll and property of the

partnership.

Then, the corporation's entire net income, excluding its distributive

share of the partnership's

income is apportioned to New Jersey by

computing the apportionment factor for that business by only

taking into account the receipts, payroll, and property of the

business that the corporation carries on directly.

Third, these two amounts would be added together to arrive at

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CORP NON UNITARY PARTNERSHIP EXAMPLE

• Corp A has no nexus with NJ other

than a 50% general pshp interest in a pshp, which is not unitary with the corp.

• The corp would calculate its

allocation factor and allocated income exclusive of the activities of the pshp. In this case, the allocation % is zero and the corp does not allocate any of its income to NJ.

• The partnership would allocate its

income as a separate entity.

• The allocated income from both

calculations are then combined to compute the tax liability of the corp. Corp Pshp Net Income $5,000 $1,000 Prop Factor 0 0.75 Receipts Factor 0 0.5 Receipts Factor 0 0.5 Payroll Factor 0 0.75 Total 0 2.5

Corp Alloc Factor 0 0.625

Allocated Income $0 $625

Note that the apportionment formula is the corporate formula, not the GIT Pshp formula.

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CORPORATE PARTNERS

Flow through accounting apportionment means:

The corporate partner shall separately compute the property,

payroll and receipts fractions attributable to the partnership

activity.

The corporate partner next computes the property, payroll

and receipts fractions attributable to the corporate activity.

An allocation factor combining the factors of the corporation

and the partnership is then applied to the corporation's entire

net income including its distributive share of the

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CORP UNITARY PARTNERSHIP EXAMPLE

Corporation A is unitary

with a partnership and

holds a 50 percent general

partnership interest in a

general partnership.

The taxpayer should use

the flow through method of

allocation since there is a

sufficient integration of

assets and business

activities between the

corporation and

partnership.

Unitary Corp Pshp Comb

Net Income $5,000 $1,000 $6,000 Prop Factor $9,000 $750 $9,750 Prop Factor $10,000 $1,000 $11,000 0.886364 Receipts Factor $3,000 $10,000 $13,000 Receipts Factor $10,000 $20,000 $30,000 0.433333 Receipts Factor $3,000 $10,000 $13,000 Receipts Factor $10,000 $20,000 $30,000 0.433333 Payroll Factor $6,000 $750 $6,750 Total $10,000 $1,000 $11,000 0.613636 Total Factors 2.366667

Income Allocation Factor (Total/4) 0.591667

Allocated NJ Taxable Income $3,550

Figure

Updating...

References

Related subjects : State income tax