Current corporate income tax developments.EXECUTIVE SUMMARY * Many states have increased the sales factor or are phasing in a single sales factor over a period of years. * California conformed to certain AJCA AJCA American Jobs Creation Act of 2004 (US) AJCA American Jersey Cattle Association AJCA Association of Juvenile Compact Administrators AJCA All Japan Cooks Association AJCA Alabama Junior Cattlemen’s Association tax-shelter reporting requirements for material advisors and listed transactions. * A number of states passed laws establishing or modifying passthrough entities' duty to withhold on nonresident owners. ********** This two-part article discusses a myriad of recent state tax activity in the corporate income tax area. Part II addresses developments on apportionment The process by which legislative seats are distributed among units entitled to representation; determination of the number of representatives that a state, county, or other subdivision may send to a legislative body. The U.S. , filing methods/unitary groups, administration and other significant state tax developments. During 2005, numerous state statutes were added, deleted or modified; court cases were decided; regulations were proposed, issued and modified; and bulletins and rulings were issued, released and withdrawn. Part I of this article, in the March 2006 issue, focused on nexus, Internal Revenue Code The Internal Revenue Code is the body of law that codifies all federal tax laws, including income, estate, gift, excise, alcohol, tobacco, and employment taxes. These laws constitute title 26 of the U.S. Code (26 U.S.C.A. § 1 et seq. (IRC (Internet Relay Chat) Computer conferencing on the Internet. There are hundreds of IRC channels on numerous subjects that are hosted on IRC servers around the world. After joining a channel, your messages are broadcast to everyone listening to that channel. ) Sec. 338(h)(10) transactions, allocable/apportionable income and tax base. Part II, below, covers some of the more important developments in apportionment, unitary groups/filing methods, administration and other significant corporate state tax issues. Apportionment A multistate corporation's business income is apportioned ap·por·tion tr.v. ap·por·tioned, ap·por·tion·ing, ap·por·tions To divide and assign according to a plan; allot: "The tendency persists to apportion blame as suits the circumstances" among the states using an apportionment percentage for each state with jurisdiction to tax the corporation. To determine the apportionment percentage, a ratio is established for each of the factors included in the state's formula. Each ratio is calculated by comparing the corporation's level of a specific activity in the state to the total corporation activity of that type everywhere. The ratios are then summed, weighted (if required) and averaged to determine the corporation's apportionment percentage for the state. The apportionment percentage is then multiplied by total corporation business income. While apportionment formulas vary, many states use a three-factor formula that includes sales, payroll and property factors. Because use of a higher-weighted sales factor generally provides tax relief for in-state corporations, most states accord more weight to the sales factor than to the other factors. Changes in the apportionment formula may also be used to provide relief or tax benefits to specific industries or to properly reflect the operations of a particular industry. Recent apportionment developments are summarized below. Increased Weighting of Sales Factor * Arizona For tax years beginning after 2006, corporations will be allowed to annually elect a super-weighted sales factor apportionment formula. If the election is made, the sales factor will be weighted 60% for 2007, 70% for 2008 and 80% after 2008. If a corporation elects the super-weighted sales factor, it must participate in an economic impact analysis tracking the number and value of investments by the electing entities. Further the super-weighted sales factor provisions will not go into effect unless specified targets for investment in the state are met. (58) * Georgia HB 191, Laws 2005, phases in a 100% sales factor formula; the sales factor will be weighted 80% for 2006, 90% for 2007 and 100% after 2007. * Louisiana For tax years beginning after 2005, HB 679, Laws 2005, increased the sales factor to 100% for businesses primarily engaged in manufacturing or merchandising. * Michigan Under SB 634, Laws 2005, the weighting of the sales factor is increased from 90% to 92.5% for 2006 and 2007, and to 95% after 2007. * Minnesota A single sales factor apportionment formula is being phased in over an eight-year period, beginning in 2007. (59) For tax years beginning in 2007, the sales factor will be increased from 75% to 78%. The sales factor will then gradually increase each year until it reaches 100% in tax years beginning after 2013. * New York New York, state, United States New York, Middle Atlantic state of the United States. It is bordered by Vermont, Massachusetts, Connecticut, and the Atlantic Ocean (E), New Jersey and Pennsylvania (S), Lakes Erie and Ontario and the Canadian province of A single sales factor apportionment for corporations taxed under Article 9-A (general business corporations) is being phased in; the sales factor weighting will be 60% for 2006, 80% for 2007 and 100% for tax years beginning after 2007. Banks and other corporations subject to Article 32 generally are not subject to single-factor apportionment except with respect to income from management and administration of investment companies. For this income, single-factor apportionment will be phased in over a three-year period with the following phase-in percentages: 50% sales, 17% payroll and 33% deposits for 2006; 70% sales, 10% payroll and 20% deposits for 2007; and 100% sales for tax years beginning after 2007. (60) * Oregon SB 31, Laws 2005, accelerated the 100% sales factor formula to be effective for tax years beginning after June 30, 2005. * Utah For tax years beginning after 2005, HB 78, Laws 2005, allows taxpayers to make a five-year irrevocable election to apportion ap·por·tion tr.v. ap·por·tioned, ap·por·tion·ing, ap·por·tions To divide and assign according to a plan; allot: "The tendency persists to apportion blame as suits the circumstances" business income using a double-weighted sales factor. Other Apportionment Developments * Arizona The Tax Appeals Board ruled that only the net gain on the sale of mortgages should be included in the sales factor and that the mortgage company's sale of the mortgages was not a separate income-producing activity, thus requiring inclusion in the numerator numerator the upper part of a fraction. numerator relationship see additive genetic relationship. numerator Epidemiology The upper part of a fraction of the sales factor for net gains realized on mortgages backed by Arizona properties and any sales originating from sales activities in Arizona. (61) * California The Franchise Tax Board (FTB FTB Franchise Tax Board (California; they collect income and sales tax) FTB Family Tax Benefit (Australian welfare assistance) FTB First Time Buyer (housing) ) provided guidance on what constitutes a "personal service" for purposes of attributing gross receipts the total of the receipts, before they are diminished by any deduction, as for expenses; - distinguished from net profits. - Bouvier. See under Gross, a. os> See also: Gross Receipt to the California sales factor using the "time spread" method, under which the time each employee spends in each state constitutes a separate income-producing activity. (62) Two decisions during 2005 addressed whether certain treasury functions should be reported at gross or net proceeds Net Proceeds The amount received after all costs are deducted from the sale of a piece of property or security. Notes: In the case of an investor selling a security, net proceeds represent the proceeds from the sale minus any trading costs (i.e. commissions). for sales factor apportionment purposes. In an unpublished decision, (63) a California Court of Appeal affirmed that a retail store's returns of principal from debt instruments held to maturity are not "sales" within the meaning of the state's Uniform Division of Income for Tax Purposes Act apportionment provisions and, accordingly, are not includible in the sales factor as gross receipts. In a different case, the California Court of Appeal held that receipts from Microsoft's sale of short-term marketable securities Marketable Securities Very liquid securities that can be converted into cash quickly at a reasonable price. Notes: Marketable securities are very liquid as they tend to have maturities less than one year, and the rate at which these securities can be bought or sold has must be excluded from the apportionment formula sales factor. (64) * Indiana The Department of Revenue (DOR Dor or Dora, Canaanite seaport, ancient Palestine (modern Israel), N of Caesarea Palestinae. It was never a Jewish city but rather a Phoenician outpost. It was rebuilt by the Romans; still visible are the ruins of a temple and a theater. ) ruled that the Indiana-source sales of a business that provides financial market data collected in California to customers nationwide via cable boxes and similar means are determined by the subscription fee income received from Indiana customers, because the fee is the income-producing activity that occurs when data is received in Indiana. (65) In a case involving dock sales, the Indiana Tax Court ruled that sales of beer to Indiana customers were not sourced to the state for adjusted gross income tax purposes because delivery took place outside the state with third-party common carriers acting as agents for the customers in retrieving the beer from the seller's out-of-state breweries and bringing it into Indiana. (66) * Massachusetts The Supreme Judicial Court both vacated in part and sustained in part the appellate court's apportionment factor inclusion and sourcing ruling involving the owner of the Boston Bruins The Boston Bruins are a professional ice hockey team based in Boston, Massachusetts. They are members of the Northeast Division of the Eastern Conference of the National Hockey League (NHL). hockey team. (67) The court sustained that gate receipts and local broadcast licensing revenues of "away games" were fully sourced to Massachusetts--the gate receipts under income-producing activity/cost or performance analysis, and the broadcast licensing revenues based on "actual use" or where the broadcast is "displayed" to viewers and generates advertising revenue. The court vacated the decision that sourced all national and international broadcast rights to Massachusetts, finding that the commissioner had not identified that a greater portion of the actual use by licensees outside the state occurred in or was "geographically associated with" Massachusetts. In another case, the Appellate Tax Board (ATB ATB Antibiotic ATB All The Best ATB Ability to Benefit ATB André Tanneberger (musician) ATB Across the Board ATB Active Time Battle (roleplaying game) ATB All Terrain Bike ATB Alberta Treasury Branches ) held that a Massachusetts manufacturer could not rely on the state's foreign-sale presumption to establish a right to apportion its income, because such presumption applies only to allow an entity to source its foreign sales outside the state once the right to apportion has been established. (68) * Michigan The Michigan Court of Appeals held the state's sales factor statute unconstitutional to the extent that the statute sourced services performed outside of the state to Michigan for "planning, design, or construction activities" for construction projects in the state. (69) In a separate development, a change in department policy (70) allows the property factor to reflect the value of films, motion pictures, master negatives, television film and videotapes as tangible personal property, rather than excluding such costs as intangible property intangible property n. items such as stock in a company which represent value but are not actual, tangible objects. . * New Mexico New Mexico, state in the SW United States. At its northwestern corner are the so-called Four Corners, where Colorado, New Mexico, Arizona, and Utah meet at right angles; New Mexico is also bordered by Oklahoma (NE), Texas (E, S), and Mexico (S). Special apportionment rules have been adopted for the publishing industry. (71) * North Carolina North Carolina, state in the SE United States. It is bordered by the Atlantic Ocean (E), South Carolina and Georgia (S), Tennessee (W), and Virginia (N). Facts and Figures Area, 52,586 sq mi (136,198 sq km). Pop. Effective Jan. l, 2005, an amended regulation excludes from a corporation's apportionment sales factor "substantial" gross receipts arising from an incidental or occasional sale of a fixed asset used in connection with the corporation's regular wade or business. (72) * Oregon Under SB 31, Laws 2005, effective for tax years beginning after 2005, the sale of goods from a public warehouse are not thrown back to Oregon when the taxpayer's only activities in the state are limited to storage of goods in the public warehouse and solicitation of sales of the taxpayer's products. In a separate development, the DOR has adopted a new apportionment rule for publishers. (73) * Pennsylvania The Pennsylvania Supreme Court affirmed (74) that a UPS subsidiary without employees could not impute impute v. 1) to attach to a person responsibility (and therefore financial liability) for acts or injuries to another, because of a particular relationship, such as mother to child, guardian to ward, employer to employee, or business associates. a payroll factor based on affiliated company employees or independent contractors for either corporate franchise or net income tax purposes. The subsidiary had paid for the imputed Attributed vicariously. In the legal sense, the term imputed is used to describe an action, fact, or quality, the knowledge of which is charged to an individual based upon the actions of another for whom the individual is responsible rather than on the individual's services using intercompany accounts, booking these costs as "payroll expenses." * Tennessee SB 2310, Laws 2005: (1) more broadly defines unitary group In mathematics, the unitary group of degree n, denoted U(n), is the group of n×n unitary matrices, with the group operation that of matrix multiplication. The unitary group is a subgroup of the general linear group GL(n, C). for purposes of determining which entities must be included in the financial organization's unitary group; (2) provides that if any member has nexus with Tennessee, the Tennessee receipts of all members (even those without nexus) must be included in the numerator of the receipts factor; and (3) increases the percentage of receipts attributable to the state by requiring a portion of the receipts that currently are not included in the numerator to be included by providing that any other receipts not specifically attributed to Tennessee or to another taxing jurisdiction must be attributed to Tennessee in the same proportion that the enumerated This term is often used in law as equivalent to mentioned specifically, designated, or expressly named or granted; as in speaking of enumerated governmental powers, items of property, or articles in a tariff schedule. receipts are attributed to Tennessee. * Texas A Texas Court of Appeal held the franchise tax earned surplus Earned surplus See: Retained earnings earned surplus See retained earnings. throwback throwback see atavism. rule was unconstitutional as it applied to the taxpayer, and consequently the taxpayer was entitled to a refund. (75) * Wisconsin For tax years beginning after 2004, AB 100, Laws 2005, sources service income revenues to the location where the benefit is derived and sources revenue from computer software to the location where the software is used. Filing Methods * California The State Board of Equalization In communications, techniques used to reduce distortion and compensate for signal loss (attenuation) over long distances. (SBE SBE - Microsoft Office Small Business Edition ) held in favor of the taxpayer that instant unity was not present on acquiring a target company for purposes of requiring a combined return. The two businesses were deemed unitary at the beginning of the next calendar year, with the SBE noting that in the interim the companies had consolidated operational departments, integrated executive staff and centralized production, distribution and their general operation system. (76) * Georgia HB 488, Laws 2005, clarifies the requirements for filing consolidated returns by providing that the commissioner will by regulation provide the period within which the permission to file a consolidated return must be requested. A request for permission beyond such period will not be considered and will result in filing separate income tax returns for the applicable year. * Idaho The State Tax Commission ruled that only insurance companies that pay Idaho premiums tax can be excluded from a unitary group's combined return. (77) * Illinois An Illinois Appellate Court The Illinois Appellate Court is the court of first appeal for cases arising in the trial courts of the state of Illinois. The court has 54 judges serving five separate districts. affirmed that Dow Chemical was unitary with Marion Laboratories only for the year after Dow's 67% acquisition of Marion Labs in return for 100% of the stock of Merrell Dow Pharmaceuticals. (78) The court found for subsequent years that, although certain mutually beneficial Adj. 1. mutually beneficial - mutually dependent interdependent, mutualist dependent - relying on or requiring a person or thing for support, supply, or what is needed; "dependent children"; "dependent on moisture" relationships between the companies occurred after Marion Labs had severed the earlier ties, such transactions did not occur as a result of integration and centralization of management that produced economies of scale, but were more indicative of a business alliance between a chemical giant and a pharmaceutical giant. In addition, less than 1% of Dow's total sales were made between the groups, and any intercompany loans were either de minimis An abbreviated form of the Latin Maxim de minimis non curat lex, "the law cares not for small things." A legal doctrine by which a court refuses to consider trifling matters. or priced at arm's-length. * Indiana The Indiana Tax Court held that a taxpayer is not required to receive permission to discontinue filing income tax returns on a combined basis and thus granted the taxpayer's retroactive three-year refund request. (79) * Kentucky HB 272, Laws 2005, requires filing nexus consolidated returns. * Missouri The Missouri Administrative Hearing administrative hearing n. a hearing before any governmental agency or before an administrative law judge. Such hearings can range from simple arguments to what amounts to a trial. There is no jury, but the agency or the administrative law judge will make a ruling. Commission ruled that a corporate affiliated group that filed consolidated Federal income tax returns was barred from filing a consolidated Missouri income tax return for a given year, because it did not timely make the state consolidated filing election pursuant to an established regulatory deadline. (80) * New York The New York Court of Appeals denied (81) hearing the lower court's decision, which had affirmed the Division of Taxation's use of discretionary authority to require combined reporting for Sherwin-Williams and its unitary trademark holding companies. In another decision involving intercompany transactions, (82) the New York Tax Appeals Tribunal affirmed the Administrative Law administrative law, law governing the powers and processes of administrative agencies. The term is sometimes used also of law (i.e., rules, regulations) developed by agencies in the course of their operation. Judge's decision regarding Disney Enterprises that (1) exclusion of three subsidiaries from the combined report would be distortive dis·tor·tive adj. Serving to distort: harsh and distortive peaks in the recorded music; a robust fortissimo without distortive vibration. , given Disney's unique inter-group synergies and the absence of arm's-length pricing; (2) royalty income can be properly included in the business allocation percentage without including the related intangible property value; (3) Disney's historical methodology of assigning royalty receipts based on the business location of its licensees was more reasonable than assigning the receipts to the locations of manufacturers contracted by its licensees for the production of the licensed goods; and (4) film masters should be reflected in the property factor at historical cost, rather than the current fair market value including reproduction rights as based on expert appraisal. * Oregon The Oregon Tax court The Oregon Tax Court is a state court in the U.S. state of Oregon, which has jurisdiction in questions of law that regard state tax laws. Examples of matters that would come before this court include income taxes, corporate excise taxes, property taxes, timber taxes, cigarette held that a corporation formed to oversee a family's investments was unitary and subject to combined reporting despite the separate nature of its business lines, with the court finding centralized management, functional integration and economies of scale. (83) Administration Tax Shelter tax shelter: see tax exemption. * California AB 115, Laws 2005, conforms to the American Jobs Creation Act of 2004 tax-shelter enforcement requirements involving the information return filing requirement for material advisors and provides that information return requirements for listed transactions would also apply to listed transactions as defined under Federal and California law California Law consists of 29 codes, covering various subject areas, the State Constitution and Statutes. See also
* Connecticut SB 1265, Laws 2005, imposes a 75% penalty for the failure to report listed transactions and a 50% penalty for the promotion of abusive tax shelters Abusive tax shelter A limited partnership that the IRS judges to be claiming tax deductions illegally. abusive tax shelter A tax shelter in which an improper interpretation of the law is used to produce tax benefits that are and also extends the statute of GLOUCESTER, STATUTE OF. An English statute, passed 6 Edw. I., A. D., 1278; so called, because it was passed at Gloucester. There were other statutes made at Gloucester, which do not bear this name. See stat. 2 Rich. II. MARLEBRIDGE, STATUTE OF. limitation (SOL) in several situations (including increasing the SOL from three to six years for failure to disclose a listed transaction) and provides that a deficiency assessment may be mailed to the taxpayer at any time if the deficiency is due to fraud or intentional evasion of the corporation tax law or its regulations. SB 1232, Laws 2005, effectively accelerates the state's 75% penalty for failure to disclose certain Federal listed transactions to audits beginning after 2005, rather than to income tax years beginning after 2004. * Minnesota HF 138/SF 106, 2005 Special Session includes reporting and disclosure requirements for tax shelters with one or more investors that are Minnesota taxpayers. The new law mandates all taxpayers required to file a Federal disclosure statement regarding a reportable or listed transaction to file a copy of that statement with the commissioner. The new law also imposes penalties for nondisclosure and the underpayment of taxes due to participation in these transactions and extends the SOL for assessments relating to relating to relate prep → concernant relating to relate prep → bezüglich +gen, mit Bezug auf +acc these transactions. * New York The State Budget for Fiscal Year 2006 (A 6845/S 3671, Laws 2005) includes new reporting requirements for disclosing information on transactions that present the potential for tax avoidance The process whereby an individual plans his or her finances so as to apply all exemptions and deductions provided by tax laws to reduce taxable income. Through tax avoidance, an individual takes advantage of all legal opportunities to minimize his or her state or federal (i.e., a tax shelter). These new reporting requirements are similar to the tax shelter disclosure requirements for Federal income tax purposes. The new law also imposes penalties for nondisclosure and the underpayment of taxes due to participation in these transactions and extends the SOL for assessments relating to these transactions. Other * Alabama Under an amended regulation (84) rulings apply only to the recipient of the request and "have no precedential prec·e·den·tial adj. 1. Of, relating to, or constituting a precedent. 2. Having precedence. Adj. 1. precedential value of other taxpayers" In addition, rulings can only be obtained on transactions/events that have not yet occurred. * Arizona SB 1171, Laws 2005, establishes a managed audit agreement program in which the DOR and the taxpayer work together to audit the taxpayer's books. A managed audit agreement is allowed for the transaction privilege tax Transaction privilege tax (TPT) refers to a gross receipts tax levied by the State of Arizona on certain persons for the privilege of conducting business in the state. TPT differs from the “true” sales tax imposed by many other U.S. , local excise tax Excise Tax 1. An indirect tax charged on the sale of a particular good. 2. A penalty tax applied to ineligible transactions in retirement accounts. This penalty is assessed by and paid to the IRS. Notes: 1. and use and luxury tax, with corporate income taxpayers becoming eligible for the program beginning January 2007. * Georgia HB 488,Laws 2005, clarifies the commissioner's authority for adjustments which may be made when the taxpayer's activities directly or indirectly distort true net income or the taxpayer engages in improper activities, and provides that the commissioner will by regulation provide when to apply this section. In a separate development, a Superior Court held (85) that even if the state's general three-year SOL for filing refund claims had lapsed, the taxpayer could generate a state tax refund Tax refund Money back from the government when too much tax has been paid or withheld from a salary. because it had filed an amended Federal return, and the statute requiring taxpayers to file an amended Georgia return within 180 days of filing an amended Federal return applies equally to Federal income tax adjustments initiated by the taxpayer or the IRS An abbreviation for the Internal Revenue Service, a federal agency charged with the responsibility of administering and enforcing internal revenue laws. . * Illinois SB 3196, Laws 2005, eliminates the state's 20% underreporting penalty enacted in 2003, but applies stricter standards to returns filed after 2004 that are subject to the late-payment penalty. * Massachusetts HB 4169, Laws 2005, includes new penalties for taxpayers and preparers that fail to disclose an "inconsistent position" when the Massachusetts income tax return reflects a departure from the application of a similar law in the filing or another state's tax return and the resulting Massachusetts tax liability is lower than a consistent interpretation. In addition, a new 20% underpayment penalty Underpayment Penalty A tax penalty enacted on an individual for not paying enough of his or her total estimated tax and withholding. If an individual has an underpayment of estimated tax, they may be required to pay a penalty (on Form 2210). is imposed on taxpayers who substantially understate un·der·state v. un·der·stat·ed, un·der·stat·ing, un·der·states v.tr. 1. To state with less completeness or truth than seems warranted by the facts. 2. their tax liability, or who underpay their taxes due to negligence or disregard of Massachusetts law. This penalty cannot be imposed on any portion of an underpayment if it is shown that there was reasonable cause and that the taxpayer acted in good faith. The commissioner is empowered to list, by regulation, abusive transactions or tax strategies that would be subject to these new penalties. * Minnesota The Minnesota Supreme Court The Minnesota Supreme Court is the highest court in the U.S. state of Minnesota and consists of seven members. The court was first assembled as a three-judge panel in 1849 when Minnesota was still a territory. held that an order assessing tax that is not in conformity with the requirements of the Taxpayers' Bill of Rights (because it did not set forth the refund claim limitation period and the methods for obtaining a refund) does not trigger the one-year period for filing a refund claim. (86) * New Hampshire New Hampshire, one of the New England states of the NE United States. It is bordered by Massachusetts (S), Vermont, with the Connecticut R. forming the boundary (W), the Canadian province of Quebec (NW), and Maine and a short strip of the Atlantic Ocean (E). HB 2, Laws 2005, authorizes the DOR to disallow To exclude; reject; deny the force or validity of. The term disallow is applied to such things as an insurance company's refusal to pay a claim. "sham transactions" between members of a controlled group and extends the applicable SOL on such transactions. (87) Sham transactions are defined to include a transaction or series of transactions without economic substance and when "there is no business purpose or expectation of profit other than obtaining tax benefits." * North Dakota SB 2132, Laws 2005, requires that any refunds or credits for taxes paid based on unconstitutionality claims must be requested within 180 days of the original return due date or the tax payment, whichever occurs first. Passthrough Entities Withholding on Nonresident Owners * Arkansas For tax years beginning after 2005, SB 509, Laws 2005, requires passthrough entities (other than investment partnerships) to withhold income tax on nonresident individual and corporate owners, unless a composite return is filed or the nonresident signs an agreement to timely file Arkansas returns. * Colorado Under HB 1251, Laws 2005, effective for tax years beginning in 2006, a publicly waded partnership is exempt from the requirement either to file with the DOR an agreement by each nonresident to pay the income tax on that partner's share of income attributable to the state or to pay the income tax on behalf of each nonresident partner, and also not to file a composite income tax return or make composite tax payments on behalf of its nonresident partners. * Maryland HB 147, Laws 2005, requires most passthrough entities to pay tax on behalf of their nonresident shareholders, partners or members at an increased rate of 6% (rather than the prior 4.75%) top marginal individual tax rate, or the 7% corporate tax rate, as applicable. The new law also extends this tax to include not only nonresident individuals, but "nonresident entities." * Minnesota For tax years beginning after 2005, HF 138, Laws 2005, requires partnerships and S corporations to make quarterly (rather than annual) payments of the income tax withheld on nonresident owners. HF 2228, Laws 2005, exempts publicly traded partnerships Publicly Traded Partnership A limited partnership that also has interests traded in the equity securities market. Notes: This is also known as a master limited partnership. See also: Master Limited Partnership, Partnership, Public Company from the nonresident withholding provisions. * North Dakota SB 2045, Laws 2005, requires passthrough entities to withhold income tax on distributions to certain nonresident members at the highest individual tax rate and permits such entities to file a composite income tax return on behalf of electing nonresident members. Withholding is not required for publicly traded partnerships and for nonresident individual owners that elect to be included in the composite return. * Oregon Effective Jan. 1, 2006, HB 2452, Laws 2005, requires passthrough entities to withhold income tax on distributions to nonresident members at the highest individual tax rate or applicable statutory corporate tax rate if such members do not elect to file as part of a composite tax return, and authorizes passthrough entities to file composite income tax returns on behalf of electing nonresident individuals, corporations or masts. * Wisconsin For tax years beginning after 2004, AB 100, Laws 2005, requires passthrough entities to withhold income tax on nonresident owners at the highest individual or corporate tax rate. Other * Connecticut The Connecticut Supreme Court The Connecticut Supreme Court, formerly known as the Connecticut Supreme Court of Errors, is the highest court in the U.S. state of Connecticut. It consists of a Chief Justice and six Associate Justices. held that corporate partners were not entitled to claim the corporate income tax credit for personal property taxes paid on electronic data processing See EDP. (application) Electronic Data Processing - (EDP) data processing by electronic machines, i.e. computers. equipment by their partnership, because partnerships are ineligible for this credit under statute and thus cannot pass it through as a conduit to its corporate partners. (88) * Idaho HB 25, Laws 2005, provides that nonresident individuals, trusts and estates must include as Idaho-sourced income any gains or losses realized from the sale or other disposition of a partnership interest or S stock, to the extent reflected by the passthrough entity's Idaho apportionment factor in the tax year immediately preceding the sale year. * Kentucky HB 272, Laws 2005, imposes corporate tax on limited liability entities (including limited liability companies, limited liability partnerships, real estate investment trusts, regulated investment companies Regulated investment company An investment company allowed to pass capital gains, dividends, and interest earned on fund investments directly to its shareholders so that it is taxed only at the personal level, and double taxation is avoided. , real estate mortgage investment conduits Real Estate Mortgage Investment Conduit (REMIC) A pass-through tax entity that can hold mortgages secured by any type of real property and can issue multiple classes of ownership interests to investors in the form of pass-through certificates, bonds, or other legal forms. and financial asset securitization Securitization The process of creating a financial instrument by combining other financial assets and then marketing them to investors. Notes: Mortgage backed securities are a perfect example of securitization. May also be spelled as "securitisation. investment trusts) by including such entities in the definition of "corporation" * Louisiana HB 130, Laws 2005, provides that effective for tax periods beginning after 2004, unincorporated organizations that elect out of partnership treatment for Federal income tax purposes are considered to have elected out of partnership treatment for Louisiana corporation income tax purposes. * Maine Effective July 1, 2005, LD 468, Laws 2005, requires the gain/loss on the sale of a partnership interest to be sourced to Maine based on a ratio of dividing the original cost of partnership tangible property tangible property n. physical articles (things) as distinguished from "incorporeal" assets such as rights, patents, copyrights, and franchises. Commonly tangible property is called "personalty. located in Maine by the everywhere cost, as determined at the time of the sale. If the partnership's asset value consists mostly of intangible property, the gain/loss is sourced using the sales factor of the partnership for its first full tax period immediately preceding the tax period during which it was sold, unless the partnership is an investment partnership. * Nebraska Effective July 16, 2005, a corporate partner's sales factor depends on whether the corPoration and partnership are unitary. If unitary, the corporation's sales factor includes its share of the partnership's sales factor; if not unitary, the corporation's sales factor includes its distributive share of the partnership income. (89) * New York City New York City: see New York, city. New York City City (pop., 2000: 8,008,278), southeastern New York, at the mouth of the Hudson River. The largest city in the U.S. For tax years beginning after 2004, SB 5568, Laws 2005, amended New York City's administrative code to more closely conform the city's unincorporated business tax to its general corporation tax by making the three-factor formula allocation method the preferred allocation method, generally allowing use of the old "books and records" method only to certain existing partnerships for an additional seven-year period. The law also conforms the city's unincorporated business tax to the general corporation tax for sourcing receipts from personal services personal services n. in contract law, the talents of a person which are unusual, special or unique and cannot be performed exactly the same by another. These can include the talents of an artist, an actor, a writer, or professional services. and the inclusion of rented tangible personal property in the property factor. * Virginia The Department of Taxation explained that a corporation is not required to file an income tax return merely because it owns an interest in an investment passthrough entity. (90) Additionally, corporations required to file Virginia tax returns and that are limited partners in such entities generally would not flow up their pro-rata share of partnership factors in computing their own Virginia apportionment factors. Miscellaneous * Arkansas SB 38, Laws 2005 (Act 63), repealed the 3% income tax surcharge that was scheduled to expire. * Connecticut H 6940, Laws 2005, imposes a 20% corporation tax surcharge for income year 2006 and a 15% surcharge for the 2007 income year. The surcharge does not apply to the $250 minimum tax. * Delaware HB 264, Laws 2005, equalizes the income tax rate for all corporations and defined Headquarters Management Corporations (HMQs) to a uniform 8.7% rate, permits HMQs that are members of an affiliated group to file consolidated income tax returns and clarifies that certain job creation and economic development investment incentives are credits against the tax owed. * Kentucky Under FIB fib n. An insignificant or childish lie. intr.v. fibbed, fib·bing, fibs To tell a fib. See Synonyms at lie2. 272, Laws 2005, the corporation license tax was repealed. The corporate rate reduced from 8.25% to 7% in 2005 and 2006, and to 6% in later years. An alternative minimum tax, equal to the lesser of 9.5 cents per $100 of Kentucky gross receipts or 75 cents per $100 of Kentucky gross profits, is imposed. * Maine LD 1691, Laws 2005, increases the tax imposed on some multistate corporations by requiring that the unitary group first determine the Maine tax on 100% of its income and then apportioning ap·por·tion tr.v. ap·por·tioned, ap·por·tion·ing, ap·por·tions To divide and assign according to a plan; allot: "The tendency persists to apportion blame as suits the circumstances" the tax to Maine, and cancelled Maine's membership in the Multistate Tax Commission. * Minnesota The Minnesota Supreme Court held that a foreign sales corporation Foreign Sales Corporation (FSC) A special type of corporation created by the Tax Reform Act of 1984 that is designed to provide a tax incentive for exporting U.S.-produced goods. (FSC FSC See: Foreign Sales Corporation ) can qualify as a foreign operating corporation (FOC foc abbr (BRIT) (= free of charge) → gratis foc (Brit) abbr (Comm) (= free of charge) → gratis ) if it meets the statutory requirements, and that dividends "deemed paid" by FSCs operating as FOCs are allowed as a state dividends-received deduction Dividends-received deduction A corporate tax deduction on income allowed by company A that is in ownership of shares of company B and receives dividends on the shares of company B. (DRD DRD Dopa-Responsive Dystonia DRD Dividends Received Deduction DRD Drag Rescue Device (firefighter bunker) DRD Deputy Regional Director DRD Data Requirements Document DRD Direct Reading Dosimeter DRD Department of Redundancy Department ) to the recipient (no DRD) is allowed for dividends "actually paid" by FSCs). (91) The court also sustained that the taxpayer was allowed to subtract 80% of fees that the FOC paid to it for services it provided. In response to this decision, HF 138/SF 106, 2005 Special Session, modified the law to provide that effective for tax years beginning after 2004 to qualify as a foreign operating corporation: (1) at least 80% of the entity's property and payroll of the entity must be outside the U.S.; (2) the entity must have a minimum of $1 million in foreign payroll and $2 million in foreign property; (3) contracted foreign work can substitute for payroll requirements in certain situations; and (4) payroll and property of unitary partnerships can be included in computations. * New York For tax years beginning after 2004, the State Budget for Fiscal Year 2006 (A 6845/S 3671, Laws 2005) increased the maximum amount of the alternative capital tax base from $350,000 to $1 million for nonmanufacturing taxpayers. * North Dakota HB 1108, Laws 2005, reduced the top corporation income tax rate from 7% to 6.5%, effective for tax years beginning after 2006. * Ohio Ohio's biennial budget bill (Am. Sub. HB No. 66) included a comprehensive restructuring of Ohio's principal tax programs. Among the key tax features include: (1) a new gross receipts tax A gross receipts tax, sometimes referred to as a gross excise tax, is a tax on the total gross revenues of a company, regardless of their source. It is similar to a sales tax, but it is levied on the seller of goods or services rather than the consumer. (Commercial Activity Tax (CAT)) imposed at a 0.26% rate incrementally phased in beginning July 1, 2005, with the 0.26% rate fully applicable on April 1,2009; and (2) the incremental phaseout phase·out n. A gradual discontinuation. of the corporate franchise tax for corporations subject to the CAT beginning with the 2006 tax year until fully eliminated for the 2010 tax year. The CAT is imposed on any individual or entity regardless of organizational form including, but not limited to, corporations, passthrough entities and entities that are disregarded for Federal income tax purposes. Excluded from application of CAT are persons with $150,000 or less of taxable gross receipts, certain insurance companies, many financial institutions, as well as most of their affiliates, and nonprofits. The statute describes the CAT as not a transactional tax and specifies that it is not subject to P.L. 86-272. The law also declares that the tax is not limited to persons with substantial nexus, even though substantial nexus is broadly defined elsewhere in the law to include any entity that can be required to remit the tax under the U.S. Constitution, is authorized to do business in Ohio, or owns or uses capital in Ohio. The law further provides ,bright line presence" criteria for establishing "substantial nexus." For more information about this article, contact Ms. Boucher at kboucher@deloitte.com. (58) AZ Stat., Ch. 11, 43-1139, as amended by Ch. 289 (HB 2139, Laws 2005). (59) HF 138/SF 106, 2005 Special Session. (60) State Budget for Fiscal Year 2006 (A 6845/S 3671, Laws 2005). (61) MDC Holdings, Inc. v. AZ Dep't of Rev. (DOR), AZ Tax App. Bd., Dkt. No. 1929-04-1 (5/24/05). (62) CA FTB Legal Ruling No. 2005-1 (3/21/05). (63) The Limited Stores, Inc., et al. v. CA FTB, CA Ct. App., 1st Dist., No. A102915 (7/28/05). (64) Microsoft Corp. v. CA FTB, CA Ct. App., 1st Dist., No. A105312 (2/28/05). (65) IN DOR Ltr. of Finding No. 03-0154 (1/1/05). (66) Miller Brewing Co. v. IN Dep't of State Rev., 831 NE2d 859 (IN Tax Ct., 2005), department motion to correct error denied 836 NE2d 498 (IN Tax Ct., 2005). (67) Boston Profl Hockey Ass'n v. MA Comm'r of Rev., 443 Mass 276 (2005). (68) Tech-Etch, Inc. v. MA Comm'r of Rev., MA ATB, Dkt. No. C260139 (6/3/05). (69) Fluor Enterprises, Inc. v. MI Dep't of Treasury, 697 NW2d 539 (MI Ct. App., 2005). (70) MI Dep't of Treasury Internal Policy Directive No. 2005-1 (5/27/05). (71) Reg. 3.5.19.19, NM Tax & Rev. Dep't (10/31/05). (72) Amended Reg. 17 NAC See network access control. 05C.1002, NC DOR (3/1/05). (73) New Rule OAR 150-314.670-(A), ORDOR (eff. 12/31/04). (74) UPS Worldwide Forwarding, Inc. v. Comm'th, PA Sup. Ct., Dkt. Nos. 1-4 MAP 2005 (12/30/05). (75) Home Interiors & Gifts, Inc. v. Strayhom, 175 SW3d 856 (TX App., Austin 2005). (76) Appeal of Boston Scientific Corp., CA SBE, Case No. 244315 (2/8/05). (77) ID State Tax Comm. Dec. No. 18612 (9/28/05). (78) The Dow Chem. Co. v. IL DOR, 832 NE2d 284 (IL App. Ct., 2005). (79) Kohl's Dep't Stores, Inc. v. IN DOR, 822 NE2d 297 (IN Tax Ct., 2005). (80) Kidde America, Inc. et al. v. MO DOR, MO Administrative Hearing Comm., No. 05-0083 RI (9/22/05). (81) Sherwin-Williams Co. v. Tax Appeals Tribunal, 4 NY3d 709 (2005). (82) In the Matter of Disney Enterprises, Inc. et al., NY Tax App. Trib., DTA DTA Drive Through Appraisal DTA Data (File Name Extension) DTA Differential Thermal Analysis DTA Department of Transitional Assistance (Massachusetts) DTA Development Trusts Association No. 818378 (10/13/05). (83) Miami Corp. v. DOR, State of OR, OR Tax Ct., No. TC-MD 021295C (2/17/05). (84) Reg. Sec. 810-14-1-.06. (85) McKesson Information Solutions LLC (Logical Link Control) See "LANs" under data link protocol. LLC - Logical Link Control v. Comm., GA Sup'r Ct., Fulton County, Civ. Act. No. 2004CV8565 (7/13/05). (86) MBNA MBNA Monument Builders of North America MBNA Mercedes-Benz North America MBNA Maryland Bank, National Association MBNA Maryland Bank North America MBNA Mount Baker Nurses Association (Bellingham, Washington) America Bank, N.A. v. MN Comm' r of Rev., 694 NW2d 778 (MN 2005). (87) See also, NH DOR Technical Information Release No. 2005-001 (8/24/05). (88) Bell Atlantic Nynex Mobile, Inc. v. CT Comm'r of Rev. Servs., 273 Conn. 240 (2005). (89) NB Keg. Sec. 24-056. (90) VA Tax Bulletin 05-6 (5/6/05). (91) Hutchinson Technology, Inc. v. MN Comm'r of Rev., 698 NW2d 1 (MN 2005). Karen J. Boucheri CPA (Computer Press Association, Landing, NJ) An earlier membership organization founded in 1983 that promoted excellence in computer journalism. Its annual awards honored outstanding examples in print, broadcast and electronic media. The CPA disbanded in 2000. Partner Deloitte Tax LLP LLP - Lower Layer Protocol Milwaukee, WI Shona Ponda, J.D. Manager Deloitte Tax LLP Atlanta, GA |
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