Leverage | SALT

Michigan and Disregarded Entities: Relief From Kmart Case Legislation????

2010-03-12T02:00:00.002-06:00

Michigan introduces Kmart legislative "fix" language in the House of Representatives.

On Wednesday, the Michigan House Tax Policy Committee unanimously passed a bill that would reverse the Kmart notice and prevent retroactive state filings. They expect a vote by the full House next Tuesday (3/16).

It is believed that the full House and Senate will pass the bill, but the legislative process is unpredictable. With that said, organizations involved in pushing the legislation believe this bill will ultimately pass.

The next few days will be crucial for this bill. Even if the bill does pass there could be legal challenges to the bill as it retroactively denies refund claims that could be made under the Kmart court case, and attempts to make retroactive law changes which might not withstand legal challenges.

A Michigan Court of Claims case last year ruled a law written in 2007 to apply retroactively back to 2002 and for all opens years, was not valid. The decision was based on a U.S. Supreme Court case which stated retroactive law changes could only have a modest period of retroactivity. In this case, the legislation is attempting to fix something going back to 1997, which would appear not to be a "modest period."

The Michigan Association of Certified Public Accountants (MACPA) and other organizations have been involved in pushing for this legislative "fix" to the Kmart case legislation 'burden."

So What?

If this legislation passes, companies that filed a Michigan Single Business Tax (SBT) return which included a disregarded entity, will not be required or allowed to file an amended return or original return (for the disregarded entity) for prior tax years. This would definitely reduce the compliance cost, but may or may not reduce a company's tax cost depending on the situation.

Stay tuned for more. For all current and future updates, go to MICHIGAN.

Colorado: Amazon Drops Affiliates!

2010-03-11T02:00:00.001-06:00

An article by Michael Cohn at WebCPA discusses how Colorado has dropped affiliates in response to Colorado's enactment of burdensome compliance requirements (HB 1193).

The article discusses how Amazon is dropping affiliates to hopefully persuade Colorado to change their law. If Colorado would change their law, Amazon says they would reinstate affiliates.

At this point, I am not sure if Colorado is open to those discussions, but we will have to wait and see.

Also, be prepared for other states to impose similar nexus standards OR notification requirements/obligations.

For all of the details, go to the ARTICLE.

Colorado: Further Guidance on Requirements on Out-of-State Retailers

2010-03-10T02:00:00.001-06:00

In previous posts, I raised areas of confusion regarding Colorado's new sales tax nexus and notification requirements enacted by the signing of HB 1193. See earlier posts.

With that said, I thought I would provide some additional clarifications:

The first section of the legislation (HB 1193) dealing with presumption nexus for remote retailers with component members of a controlled group is in a different statute separate from the second part of the legislation. Therefore, the second part of the legislation dealing with "non-collecting retailers" appears to apply to all "non-collecting retailers" as defined in the emergency regulations. In other words, the notice requirements appear to apply to all retailers that sell into Colorado and do not collect sales tax, regardless of nexus, and regardless if the remote retailer has an affiliate with a physical presence in Colorado.

In regards to the $100,000 threshold, if you read the legislation closely, you will see it simply says any retailer with "total Colorado sales of more than 100,000 in year" is required to file the annual statement by "magnetic media." It doesn't say that those retailers with less than $100,000 in Colorado sales are not required to file an annual statement at all. The emergency regulations say that each non-collecting retailer with less than $100,000 "total gross sales" is exempt. Therefore, this exemption is based on "total gross sales" of the entity and not "total Colorado sales." Again, the statute does not provide the exemption, the regulations do. Who will trump?

CAVEAT: Those are my interpretations at the moment. We will have to wait and see if Colorado issues any more guidance or changes.

ADDITIONAL ITEMS TO NOTE

I have become aware that the Multistate Tax Commission (MTC) is currently in the process of creating 2 model statutes regarding sales tax:

The Affiliate Nexus standard - similar to New York's

The Notification standards - similar to Colorado's

MEANING: We could see other states adopt statutes similar to New York's and Colorado's.

CONSTITUTIONAL BURDEN?

It is believed that someone may file a lawsuit against Colorado's notification requirements prior to May 1st (when the grace period is over). The issue is that the requirements being imposed on out-of-state retailers without nexus is unconstitutional. The defense may be that the requirements being imposed are not a tax, but simply informational.

Please contact me at brian.strahle@bakertilly.com to discuss the impact on your company's situation.

For all blog posts related to this issue (past and future), go to COLORADO.

Minnesota: R&D Credit Under Attack!

2010-03-08T09:10:00.004-06:00

I just recently became aware that Minnesota is aggressively auditing companies who have filed research and development (R&D) credit claims on their Minnesota return.

Minnesota is hiring additional auditors to pursue invalid R&D credit claims. Despite the fact that Minnesota follows the IRS' rules in regards to the R&D credit, it is not going to approve an R&D credit simply because the IRS signs-off on it.

SO WHAT?

Therefore, if you have taken an R&D credit on your Minnesota return over the past 3 or 4 years, or will be taking one this year, please make sure your documentation is in order in preparation for an audit. In other words, an R&D credit on your Minnesota return may have turned into a "red flag" for Minnesota audit purposes.

With that said, if you do have adequate documentation to support your R&D credit, you can win under audit.

We have defended several clients recently in this position, and expect the number to rise. As always, winning or losing depends on your facts and how your position is presented.

ACTION?

If your company has taken a Minnesota R&D credit or will be taking one on this year's return, please contact me at brian.strahle@bakertilly.com to discuss if a review of your files or documentation may be helpful.

Also, if you are contacted by Minnesota for an audit, please contact me at brian.strahle@bakertilly.com for representation or assistance.

State Income Tax Compliance Reminders / ALERT!

2010-03-04T02:00:00.001-06:00

As we approach the 2009 state income tax return deadlines of March 15th, April 15th and May 15th, I wanted to provide a brief list of some items to watch out for:

Service companies should be aware of the different state apportionment rules.
Texas and Michigan should be reviewed very closely due to the volume of notices most companies received last year.
Treatment of Disregarded entities by Michigan, and Michigan's Unitary test.
Wisconsin combined reporting rules in effect for 2009.
Treatment of COD income by states – apportionable income? Included in apportionment factor?
For Minnesota residents, cannot take a credit for taxes paid to Texas, Michigan and Ohio.
Most corporations are not subject to the Ohio Franchise tax anymore (for tax years ending in 2009 and beyond). The Ohio CAT tax is now fully phased-in.
Ohio S Corporation Status Filing requirement (FT-1120S) no longer required to be filed.
State depreciation adjustments (bonus depreciation and Sec. 179).
Composite return requirements and nonresident shareholder agreement requirements.
California $800 minimum tax due with 1st quarter 2010.
California LLC fee estimate for 2010 due 6/15/2010.
Remember: CA LLC Fee is based only on California receipts, not everywhere gross receipts.

Need a Second-Opinion?

As your company or your clients get closer to the filing deadline, please contact me at brian.strahle@bakertilly.com with any questions.

I am available to review any state income tax returns, provide a consultation on any state income tax FIN 48 reviews, or questions involving apportionment, nexus, business vs. nonbusiness income, unitary analysis, audit/notice representation, etc.

Thank You!

As always, I hope you find the information I provide helpful. I want to thank those of you who have contacted me with questions and comments, and the positive feedback I have received. I really appreciate it.

Colorado Imposes New Requirements on Retailers Without Nexus?

2010-03-02T02:00:00.013-06:00

Updated for Emergency Regulations as of March 3, 2010!

As stated yesterday and in earlier posts, Colorado has not only enacted a rebuttable nexus presumption on remote sellers that are part of a controlled group of corporations that contains a retailer with a physical presence in Colorado, but they have also imposed some burdensome notification and filing requirements on "retailers that do not collect Colorado sales tax."

According to Emergency Regulations,

A retailer that does not collect Colorado sales tax is a retailer that sells taxable property or services to customers who are not exempt from sales tax but does not collect Colorado sales or use tax. Such retailers are also referred to in this regulation as “non-collecting retailers”.

NOTICE REQUIRED ON EACH INVOICE!

A non-collecting retailer must give notice with respect to all Colorado destination sales that Colorado tax is due on all non-exempt purchases. This notice must appear on each invoice. See the Emergency Regulations for details on what the notice should include.

Non-Collecting Retailers with Less than $100,000 in Total Sales are Exempt From Requirement???? (Emergency Regulations vs. HB1193 statute)

This is what the Emergency Regulations state.

Any non-collecting retailer that made total gross sales in the prior year of less than $100,000 shall be exempt from the notice requirement in (3)(a).

(NOTE: Despite this exemption, are you going to know if you will be under this threshold for the year, at the time you are making sales into Colorado?)

The actual statute under HB 1193 states:

the Executive Director of the DOR may require any retailer that does not collect Colorado sales tax that makes total Colorado Sales of more than one hundred thousand dollars in a year to file the annual statement described in sub-subparagraph (A) of this subparagraph (II) by magnetic media or another machine-readable form for that year.

Therefore, under the statute, the $100,000 gross receipts threshold or exemption does not exist in regards to the "notice requirement."

Unfortunately, until Colorado clarifies, this remains unclear.

Penalty for Non-Compliance ($5 for EACH INVOICE)

The non-collecting retailer shall pay a penalty of $5 for each invoice documenting a sale to a Colorado purchaser on which the required notice does not appear.

GRACE PERIOD (Waiver of Penalties March 1 - April 30)

Because of the brief time period between enactment of the governing statute and required implementation, if a non-collecting retailer begins to provide the required notices or begins to collect Colorado sales tax prior to May 1, 2010, any penalties that would otherwise be due for invoices issued between March 1, 2010 and April 30, 2010 shall be waived. However, no such waiver shall automatically apply if the non-collecting retailer does not begin to issue the required notices or begin to collect Colorado sales tax prior to May 1, 2010.

SUMMARY

In addition to the above notification requirement per notice, there is the annual notices (one to the purchasers by 1/31; and one to Colorado DOR by 3/1). See yesterday's post.

Current Confusion:

Do these notice requirements only apply to remote retailers that do not collect sales tax, and are part of a controlled group of corporations that contains a retailer with a physical presence in Colorado?
Or do the notice requirements apply to all retailers that sell into Colorado regardless of nexus, and regardless if the remote retailer has an affiliate with a physical presence in Colorado?
Can the state impose information reporting requirements on remote retailers that lack nexus on their own just because an affiliate has nexus, if the affiliate does not act or represent the remote retailer in any way?
Are remote retailers that sell less than $100,000 in total sales in a year exempt from the notification and filing requirements?

If these changes impact your company, please contact me at brian.strahle@bakertilly.com for guidance. Also, stay tuned for additional updates or changes.

For current udpates go to COLORADO.

Colorado: New Retailer Nexus Presumption Standard Begins March 1, 2010! (plus other filing requirements)

2010-03-01T02:00:00.002-06:00

As I stated in earlier posts, Colorado has suspended several tax exemptions, and expanded or clarified the taxation of software, etc. However, one of the bills the Governor signed creates a rebuttable nexus presumption that out-of-state retailers (that do not collect Colorado sales tax) are doing business in Colorado if they are part of a controlled group of corporations which contains a retailer with a physical presence in Colorado. This new law takes effect March 1, 2010; or in other words, today!

Here is the excerpt from the Bill (H1193):

COMMENCING MARCH 1, 2010, IF A RETAILER THAT DOES NOT COLLECT COLORADO SALES TAX IS PART OF A CONTROLLED GROUP OF CORPORATIONS, AND THAT CONTROLLED GROUP HAS A COMPONENT MEMBER THAT IS A RETAILER WITH PHYSICAL PRESENCE IN THIS STATE, THE RETAILER THAT DOES NOT COLLECT COLORADO SALES TAX IS PRESUMED TO BE DOING BUSINESS IN THIS STATE. FOR PURPOSES OF THIS SUBPARAGRAPH (II), "CONTROLLED GROUP OF CORPORATIONS" HAS THE SAME MEANING AS SET FORTH IN SECTION 1563 (a) OF THE FEDERAL "INTERNAL REVENUE CODE OF 1986", AS AMENDED, AND "COMPONENT MEMBER" HAS THE SAME MEANING AS SET FORTH IN SECTION 1563 (b) OF THE FEDERAL "INTERNAL REVENUE CODE OF 1986", AS AMENDED. THIS PRESUMPTION MAY BE REBUTTED BY PROOF THAT DURING THE CALENDAR YEAR IN QUESTION, THE COMPONENT MEMBER THAT IS A RETAILER WITH PHYSICAL PRESENCE IN THIS STATE DID NOT ENGAGE IN ANY CONSTITUTIONALLY SUFFICIENT SOLICITATION IN THIS STATE ON BEHALF OF THE RETAILER THAT DOES NOT COLLECT COLORADO SALES TAX.

Requirements of Retailers That Do NOT Collect Colorado Sales Tax

In addition to the rebuttable nexus presumption standard, Colorado has also created a few additional requirements for companies that do NOT collect Colorado sales tax. Again, for your convenience, I have published the actual excerpts from the bill.

Notification to Purchasers

EACH RETAILER THAT DOES NOT COLLECT COLORADO SALES TAX SHALL NOTIFY COLORADO PURCHASERS THAT SALES OR USE TAX IS DUE ON CERTAIN PURCHASES MADE FROM THE RETAILER AND THAT THE STATE OF COLORADO REQUIRES THE PURCHASER TO FILE A SALES OR USE TAX RETURN.

EACH RETAILER THAT DOES NOT COLLECT COLORADO SALES TAX SHALL SEND NOTIFICATION TO ALL COLORADO PURCHASERS BY JANUARY 31 OF EACH YEAR SHOWING SUCH INFORMATION AS THE COLORADO DEPARTMENT OF REVENUE SHALL REQUIRE BY RULE AND THE TOTAL AMOUNT PAID BY THE PURCHASER FOR COLORADO PURCHASES MADE FROM THE RETAILER IN THE PREVIOUS CALENDAR YEAR. SUCH NOTIFICATION SHALL INCLUDE, IF AVAILABLE, THE DATES OF PURCHASES, THE AMOUNTS OF EACH PURCHASE, AND THE CATEGORY OF THE PURCHASE, INCLUDING, IF KNOWN BY THE RETAILER, WHETHER THE PURCHASE IS EXEMPT OR NOT EXEMPT FROM TAXATION. THE NOTIFICATION SHALL STATE THAT THE STATE OF COLORADO REQUIRES A SALES OR USE TAX RETURN TO BE FILED AND SALES OR USE TAX PAID ON CERTAIN COLORADO PURCHASES MADE BY THE PURCHASER FROM THE RETAILER.

Notification to the Department of Revenue

EACH RETAILER THAT DOES NOT COLLECT COLORADO SALES TAX SHALL FILE AN ANNUAL STATEMENT FOR EACH PURCHASER TO THE DEPARTMENT OF REVENUE ON SUCH FORMS AS ARE PROVIDED OR APPROVED BY THE DEPARTMENT SHOWING THE TOTAL AMOUNT PAID FOR COLORADO PURCHASES OF SUCH PURCHASERS DURING THE PRECEDING CALENDAR YEAR OR ANY PORTION THEREOF, AND SUCH ANNUAL STATEMENT SHALL BE FILED ON OR BEFORE MARCH 1 OF EACH YEAR.

THE EXECUTIVE DIRECTOR OF THE DEPARTMENT OF REVENUE MAY REQUIRE ANY RETAILER THAT DOES NOT COLLECT COLORADO SALES TAX THAT MAKES TOTAL COLORADO SALES OF MORE THAN ONE HUNDRED THOUSAND DOLLARS IN A YEAR TO FILE THE ANNUAL STATEMENT.

Penalties for Non-Compliance

There are penalties for not filing the appropriate notifications to Colorado purchasers and the Colorado DOR. See the bill for all of the ugly details.

Conclusion

If these new provisions impact your company, please be aware that Colorado is in the middle of issuing emergency regulations surrounding this new law. If you have any questions regarding these new requirements and standards, please contact me at brian.strahle@bakertilly.com.

For current updates, go to COLORADO.

Colorado Governor Signs BILLS Suspending Special Tax Breaks

2010-02-26T02:00:00.003-06:00

On February 24th, the Governor of Colorado signed nine pieces of legislation that suspend or eliminate several special tax breaks in order to help balance the state’s budget by generating $15.6 million in revenue this fiscal year and $132.6 million next fiscal year.

According to the PRESS RELEASE, the Governor did not want to sign the nine pieces of legislation, but felt he had no choice.

Gov. Ritter signed the following bills:

House Bill 1189, Eliminate Sales Tax Exemption for Direct Mail
House Bill 1190, Suspend Industrial Fuel Sales and Use Tax Exemption
House Bill 1191, Eliminate Candy and Soda Sales Tax Exemption
House Bill 1192, Repeal Sales and Use Tax Exemption of Standardized Software
House Bill 1193, Sales Tax Out-of-State Retailers
House Bill 1194, Eliminate Non-Essential Articles Sales Tax Exemption
House Bill 1195, Suspend Ag Sales & Use Tax Exemption
House Bill 1196, Income Tax Credit Vehicles Using Alternative Fuels
House Bill 1199, Limit the Net Operating Loss Deduction Temporary Limit

Two additional bills are pending:

House Bill 1197, Reduce Conservation Easement Cap Amount
House Bill 1200, Limit Enterprise Zone Investment Tax Credit

Tax Increases in Colorado - Will it Spread?

As you can see, Colorado has balanced their budget by raising taxes (eliminating or suspending exemptions, etc.) and asking everyone, or atleast several groups of taxpayers to share the pain.

Based on legislative proposals being discussed around the country in several states, I think you can expect to see other states finally reach a breaking point where they are forced to raise taxes to balance their budgets as well.

Stay tuned.

For current updates, go to COLORADO.

State Depreciation Adjustments: Limitations on Sec. 179, Bonus Depreciation, Etc.

2010-02-24T08:03:00.003-06:00

As you may be aware, most, if not all states require taxpayers to make some type of adjustment to taxable income for depreciation taken on the federal return, including Sec. 179 and/or bonus depreciation.

For example, Minnesota requires 80% of federal bonus depreciation to be added-back to taxable income. Minnesota also did not adopt the increased Sec. 179 expensing; therefore, 80% of the difference between what Minnesota allows and what is allowed for federal purposes is added-back.

Another example is Texas. Texas, recently provided guidance in its Tax Policy News regarding Sec. 179 adjustments as follows:

An Internal Revenue Code (IRC) Section 179 expense deduction is allowed for taxable entities that elect to deduct cost of goods sold (COGS) to compute their margin. Only taxable entities that sell real or tangible personal property in the ordinary course of business are eligible to deduct COGS. Allowable costs include depreciation and IRC Section 179 expense deductions that are related specifically to equipment used in the production of goods.

“Internal Revenue Code” is defined in Texas Tax Code Section 171.0001(9) as the Internal Revenue Code of 1986 in effect for the federal tax year beginning on Jan. 1, 2007, not including any changes made by federal law after that date. Therefore, for Texas franchise tax, any increase or decrease in the Section 179 expense deduction is tied to the IRC Section 179 in effect as of Jan. 1, 2007. The changes in the Section 179 expense deduction allowed by the Small Business and Work Opportunity Act of 2007 and the American Recovery and Reinvestment Act of 2009 do not apply to franchise tax reports.

Therefore, for franchise tax report year 2008, the limit is $112,000. The limit for 2009 is $115,000, for 2010 is $120,000, and for 2011 is $25,000. Again, the years as noted are the "franchise tax report year," and not the "accounting period/year." The report coming due in May of 2010 is the 2010 report year.

If you have questions about a state's depreciation adjustments please contact me at brian.strahle@bakertilly.com.

State Income Tax Nexus: Is Your Company Protected?

2010-02-22T02:00:00.002-06:00

"P.L. 86-272" - have you heard of it?

It is the Federal Interstate Income Tax Law (P.L. 86-272) that prohibits any state from imposing a net income tax on income derived within that state from interstate commerce if the only business activity within the state is the "solicitation of orders" for tangible personal property, provided that the orders are approved and filled outside the state. (15 U.S.C. §381)

After reading that, do you see all of the criteria your company must meet in order for P.L. 86-272 to apply to your company's situation?

In order to provide some guidance or clarity, the following is a brief tutorial on P.L. 86-272.

MAIN POINTS TO CONSIDER WHEN APPLYING P.L. 86-272

P.L. 86-272 only applies to "income taxes" or "taxes based on income." Therefore, it does not apply to franchise taxes if they are not based on income. An example of this is Texas' Franchise Tax (Margin Tax). Also, the gross receipts tax portion of Michigan's MBT (however, P.L. 86-272 does apply to the business income tax portion of Michigan's MBT). Other examples of where P.L. 86-272 does not apply include Ohio's CAT tax and Washington's Business and Occupation (B&O) tax.
P.L. 86-272 does NOT apply to companies that are soliciting sales of services or other business activities that are NOT selling tangible personal property. Therefore, P.L. 86-272 does not apply to service companies/providers that are only soliciting sales in a state, whether it is via its own employees or even through the use of independent contractors.
P.L. 86-272 only applies to companies that are soliciting sales of tangible personal property in a state with their own employees or via independent contractors. With that said, "solicitation of sales" can be the only activity that these employees or independent contractors complete. Some "ancillary activities" are allowed, but BE CAREFUL.
If your company is selling tangible personal property, you can still lose the protection of P.L. 86-272 if your company performs other activities within in a state in addition to solicitation, such as installation. The use of independent contractors to perform other activities such as installation can also lead to the loss of protection under P.L. 86-272.
If your sales representatives, whether they are employees or independent contractors, have the right to approve sales orders in the state of solicitation, then P.L. 86-272 protection may be lost. Sales orders should be sent out of state for approval.

These are just a few of the main points to consider when applying P.L. 86-272 to your company's situation. If you are not sure whether your company has nexus or is protected under P.L. 86-272, please contact me at brian.strahle@bakertilly.com.

Minnesota: Research Credit Confusion???

2010-02-19T02:00:00.001-06:00

In 2008, House Bill HF 3149 changed some language in Minnesota statute 290.068, Subd 3, which apparently has caused some confusion among taxpayers. Therefore, I thought I would try to provide some clarity.

CONFUSION??

HF 3149 changed the language of 290.068, Subd 3, by saying:

"the credit for the taxable year shall not exceed the liability for tax. 'Liability for tax' for purposes of this section means the tax imposed under Section 290.06, subdivision 1, for the taxable year reduced by the sum of the nonrefundable credits allowed under this chapter."
Before the amendment, the statute said:

"the 'liability for tax' for purposes of this section means the tax imposed under this chapter."

Some taxpayers interpreted this change as creating a new limitation on the use of the Minnesota research credit, such as limiting the credit to the difference between a taxpayer's regular tax liability and it's alternative minimum tax liability. However, that is not the case.

CLARIFICATION

The House Research Bill Summary related to Bill HF 3149 states that the change in language in the credit for increasing research activities was made to clarify that the research credit applies against the regular corporate franchise tax and not the alternative minimum tax. Effective beginning in tax year 2008.

If you follow the form instructions and the statute 290.068, Subd 3, you will find that the credit is always limited to a taxpayer’s “regular franchise tax” liability.

Therefore, if you are in AMT, the credit is still available, but it is limited to the amount of the taxpayer’s “regular franchise tax” liability.

If you have any questions regarding your Minnesota research credit, please contact me at brian.strahle@bakertilly.com.

Colorado: Proposals Pass House and Senate!

2010-02-17T02:00:00.001-06:00

Colorado is seriously considering the following:

Limiting the amount of NOLS that a corporation may claim for tax years beginning on or after January 1, 2011, but prior to January 1, 2014, to $250,000 (House Bill 1199, approved in Senate, 2/10/10). See the bill for all of the details.
Suspending the sales tax exclusion for sales and purchases of electricity, coal, gas, fuel oil, steam, coke, or nuclear fuel for use in processing, manufacturing, mining, refining, irrigation, construction, telegraph, telephone, and radio communication, street transportation services, and all industrial uses (HB 1190, approved in Senate 2/10/10).
Changing the taxation of "standardized software" or "pre-packaged software." Under the proposal, tangible personal property subject to tax would include "standardized software," without regard to how it is acquired by the purchaser or downloaded to the purchaser's computer. Separately stated IT services or separately stated custom software that is part of "modified off-the-shelf software" would not be intended to be taxed as long as they constitute "pure" custom software (HB 1192, approved in Senate 2/10/10). Would take effect on March 1, 2010.
Retailers that do not collect Colorado sales tax would be presumed to be doing business in the state if that retailer is part of a controlled group of corporations that has a component member that is a retailer with physical presence in the state. The presumption would be rebuttable. The bill includes additional requirements. (HB 1193, approved in Senate 2/10/10).

If you operate in Colorado, stay tuned to see if these changes get enacted. They are getting close.

For current updates, go to COLORADO.

Illinois: Pass-Through Entity Payments Correction (Form IL-1000)

2010-02-15T02:00:00.001-06:00

Correction for 2009 Form IL-1000, Pass-through Entity Payments Income Tax Return

Issue:
The 2009 Form IL-1000 does not allow a place for taxpayers to take credit for payments made on Form IL-1000-P, Pass-through entity prepayment voucher. How do we calculate the return and take credit for those payments?

Answer:
For 2009, you should calculate the return as it is provided. After calculating Line 8, Tax due, you may subtract any payment amounts you made on Form IL-1000-P, before writing your check or money order for payment. Be sure to write the amount you are actually paying in the box at the top of the form because it may be different from the amount you are actually paying.

EX:
Line 8 – $1000.00
IL-1000-P payments made – $500.00

Make annual payment for $500.00 and write $500.00 in the box at the top of the form.

EX:
Line 8 – $1000.00
IL-1000-P payments made – $1000.00

Send no annual payment with the return and write $0.00 in the box at the top of the form.

EX:
Line 8 – $1000.00
IL-1000-P payments made – $1500.00

Send no annual payment with the return, write $0.00 in the box at the top of the form, and be sure to distribute total payments made, including any overpayment, on Schedule K-1-P or K-1-T to partners/shareholders/beneficiaries because you, as the entity, cannot claim a refund on this return. Only owners are allowed to claim refunds on their Illinois annual returns.

Minnesota: State of the State Address = Jobs Creation Bill??

2010-02-12T08:21:00.004-06:00

In Minnesota, Governor Tim Pawlenty delivered his State of the State Address yesterday. Within his speech, he communicated that he would be proposing a "Jobs Creation Bill" that has six vital parts:

A 20% reduction in the corporate tax rate;
A 20% exclusion from taxation for small businesses;
An angel investment tax credit;
A supercharged research and development tax credit;
A capital gains exclusion for qualified investments; and
Incentives for companies to invest in Minnesota small businesses.

Currently Minnesota has the 8th worst business tax climate with the 3rd highest corporate tax rate in the world. With Minnesota's budget deficit currently estimated at $1.2 billion and growing, the Governor is seeking to cut spending and taxes to encourage economic investment and development within Minnesota.

Stay tuned to see if any of the Governor's proposals get enacted.

Michigan: Disregarded Entities ON ALERT!

2010-02-10T09:08:00.006-06:00

Is it just me, or does Michigan like to be the center of attention? Okay, just a little humor.

ATTENTION: DISREGARDED ENTITIES!

If you are operating in Michigan or have any connection with Michigan today or especially in the past, you are going to want to read Michigan's latest NOTICE to taxpayers regarding KMART Michigan Property Services, LLC.

According to the Notice and as a result of the Court of Appeals case,

KMPS was required to file a SBT return, regardless of its classification as a disregarded entity for federal tax purposes, because KMPS fit within the statutory definition of a “person” conducting business activity and the SBTA required all persons conducting business activity in the state to file a SBT return. Therefore, the SBTA does not support the requirement of RAB 1999-9 that an organization that is a disregarded entity for federal tax purposes for a given taxable period must also file as a disregarded entity for state tax purposes.

RETROACTIVE APPLICATION!!

The main point in all of this is that Michigan will apply the result of the Kmart court case to all open tax years.

RETURNS REQUIRED FOR ALL TAX YEARS EXCEEDING FILING THRESHOLD

Pursuant to Kmart, persons that are disregarded entities for federal tax purposes that filed as a branch, division, or sole proprietor of their owner for SBT purposes ("previously disregarded entities") must now file a separate SBT return for all open tax periods.

Previously disregarded entities are considered non-filers for statute of limitations purposes under MCL 205.27a. Consequently, returns must be filed for all tax years for which the previously disregarded entity exceeds the filing threshold.

NOTE: Disregarded entities may be eligible to file a Voluntary Disclosure Agreement to limit the lookback period; however, at this time, it is unclear.

AMENDED RETURNS FOR TAXPAYERS THAT INCLUDED DISREGARDED ENTITIES

Persons that previously filed SBT returns that included one or more previously disregarded entities must amend their returns for all open periods. These persons may not amend returns beyond the statute of limitations set forth under MCL 205.27a.

ALL ACTION MUST TAKE PLACE BY SEPTEMBER 30, 2010

All persons required to file or amend a return under Kmart and this Notice must do so by September 30, 2010.

INTEREST AND PENALTIES

Interest under MCL 205.23 and MCL 205.24 is due for any deficiencies in tax payments and shall be added to the tax from the time the tax was originally due. Interest on refunds due to amended returns or returns filed by previously disregarded entities shall be calculated and added to the refund commencing 45 days after the claim is filed.

Failure to file penalties under MCL 205.24 will be waived for all returns filed and paid by September 30, 2010. Penalty will be assessed against any previously disregarded entity that fails to file a required return by September 30, 2010.

REGISTRATION, FILING, CONTROLLED GROUPS

Additional guidance on registration, filing and controlled groups is provided in the NOTICE.

CURRENT RECOMMENDATION?

The Michigan legislature may take action before September to clarify or rectify this situation. Also, additional information from the Michigan Department of Treasury may be released to provide more guidance. Therefore, disregarded entities may want to hold-off on complying with this notice until things become clearer.

If you have any questions or need assistance, please contact me at brian.strahle@bakertilly.com.

Washington: Economic Nexus and Market Based-Sourcing PROPOSED!

2010-02-08T09:31:00.004-06:00

Washington has proposed an economic nexus standard for the business and occupation (B&O) tax, single-sales factor apportionment for financial institutions, and market-based sourcing for service revenue.

ECONOMIC NEXUS

According to HB 3157, for purposes of imposing the state business and occupation (B&O) tax on service activities and the activity of receiving royalty income, a business or individual will have substantial nexus with the state if the individual or business meets one of the following requirements:

An individual is a resident or domiciled in the state;
A business entity is organized or commercially domiciled in this state; OR
The individual or business is organized or domiciled outside the state but has more than $50,000 of property in the state, more than $50,000 of payroll in the state, more than $500,000 of receipts from this state, or at least 25 percent of the individual's or business's total property, total payroll, or total receipts in this state. This nexus standard only applies to service activities and the activity of receiving royalty income.

A business or individual with substantial nexus in any tax year is deemed to have substantial nexus with the state for the following four tax years.

SINGLE-SALES FACTOR APPORTIONMENT / MARKET-BASED SOURCING

According to HB 3157, apportionment using the receipts factor would replace the three-factor apportionment formula for financial institutions and the cost apportionment formula for other businesses providing services. The language in the bill is as follows:

Except for financial institutions, gross income is attributable to this state based on the following series of hierarchical rules:

Income is attributable to this state if the customer received the benefit of the service in this state or used the business's intangible property in this state;
If the customer received the benefit of the service or used the intangible property in more than one state, income is attributable to the state where the service was primarily received or where the intangible property is primarily used;
If income cannot be attributed under the foregoing, then the income is attributable to the state where the customer ordered the service or where the royalty agreement was negotiated;
If income cannot be attributed under the foregoing, then the income is attributable to the state to which the billing statements or invoices are sent to the customer;
If income cannot be attributed under the foregoing, then the income is attributable to the state from which the customer sends payment to the business;
If income cannot be attributed under the foregoing, then the income is attributable to the state where the customer is located; and
If income cannot be attributed under the foregoing, then the income is attributable to the state where the business is domiciled.

For financial institutions, gross income is attributable to this state as follows:

Interest, fees, and penalties on credit card receivables, and net gains from the sale of credit card receivables, are attributable to this state if the billing address of the cardholder is in this state;
Interest, fees, and penalties on secured loans are attributable to this state if the property securing the loan is located within this state;
Interest, fees, and penalties on unsecured loans are attributable to this state if the borrower is located in the state;
Net gains on the sale of loans and loan servicing fees are attributable to this state in the same manner as provided in two or three for secured and unsecured loans; and
Interest, dividends, net gains, and other income from investment assets and activities and from trading assets and activities, are attributable to this state if the income is properly assigned to a regular place of business of the financial institution within this state. This would apply to income from investment securities, trading account assets, federal funds, futures contracts, forward contracts, swaps, and foreign currency transactions.

If the bill passes, it would take effect on July 1, 2010.

Sales Tax: Is Your Head in the Clouds? (Cloud Computing, that is)

2010-02-05T07:23:00.004-06:00

As I have mentioned on this blog before, the sales taxation of digital products and electronic commerce have become increasingly more important issues. As everyone knows, states are hurting for revenue, and since our economy has moved more and more towards electronic commerce, the states must figure out a way to tax it, or else lose out on much needed revenue.

According to Wikipedia,

"Cloud computing" describes a new supplement, consumption and delivery model for IT services based on the Internet, and it typically involves the provision of dynamically scalable and often virtualized resources as a service over the Internet. The term cloud is used as a metaphor for the Internet, based on the cloud drawing used to depict the Internet in computer network diagrams as an abstraction of the underlying infrastructure it represents.

Typical cloud computing providers deliver common business applications online which are accessed from a web browser, while the software and data are stored on servers.

These applications are broadly divided into the following categories that emphasize the concept of "Everything-as-a-Service": Software as a Service (SaaS), Utility Computing, Web Services, Platform as a Service (PaaS), Managed Service Providers (MSP), Service Commerce, and Internet Integration.

How are the states going to tax it?

The problem with cloud computing is where is it located? What state has the right to tax it? Some states may tax it where it is used. Some states may tax it based on the location of the servers. Some states may tax it where the office of the cloud computing provider resides. This is only the beginning of the state of confusion regarding the state taxation of cloud computing and other electronic commerce.

As I have mentioned in earlier blog posts, some states like Washington, North Carolina, and Wisconsin have updated their laws recently to broaden their tax to tax more digital products. I have also mentioned how New York is really reaching to expand the sales tax to services delivered over the internet, not just tangible personal property delivered electronically.

Impact?

If you or your client is involved in cloud computing or selling just about anything over the internet, chances are, some state wants to tax that sale.

If you have any questions regarding the sales taxation of cloud computing, digital products, software or services over the internet, please contact me at brian.strahle@bakertilly.com.

Combined Reporting: "THE PROPOSALS"

2010-02-03T02:00:00.001-06:00

Here come the Proposals.

The Florida House and Senate have proposed to require combined reporting beginning in 2011, and also to reinstate the Florida Intangible Tax starting January 1, 2011. (HB 675 and SB 1406).

Maryland has proposed to require combined reporting beginning in 2011 (HB 10).

New Mexico has proposed to require combined reporting beginning in 2011 (SB 90).

Iowa has proposed to require combined reporting (SSB 3122) starting January 1, 2010 (yes, retroactive).

Virginia has proposed to require combined reporting in 2011 (SB 705).

Will they be enacted?

Who's next?

Stay tuned.

"Amazon" Nexus Is Spreading Like Wildfire"

2010-02-01T02:00:00.001-06:00

As expected, more states are following in New York's, North Carolina's and Rhode Island's footsteps.

Virginia (SB 660), Mississippi (SB 2927), New Mexico (HB 50) and Colorado (HB 1193) have proposed to adopt an"Amazon" nexus presumption bill similar to New York's.

These bills have their differences, but they are also very similar. The following is a sample of some of the language included in the bills:

A person with no physical presence in the state is presumed to be engaging in business in the state if:

that person enters into an agreement with an in-state resident under which the resident, for a commission or other consideration, directly or indirectly refers potential customers, whether by link or an Internet web site, to that person; and
the cumulative gross receipts from sales by that person attributable to referred customers by all residents with such an agreement are greater than $10,000 during the preceding 12-month period.

The nexus presumption would be rebuttable by proof that the resident made no solicitation in the state that would satisfy U.S. constitutional nexus requirements on behalf of the person presumed to be engaging in business in the state.

So What?

If you are selling goods over the Internet or through an affiliate program, these bills, if enacted, may affect your tax obligations in the states mentioned above.

If you are in need of representation regarding "Amazon" nexus or other nexus issues, please contact me at brian.strahle@bakertilly.com.

Uncertain Tax Positions: FIN 48, the IRS and the States??

2010-01-28T02:00:00.001-06:00

Uncertain Tax Positions; do you have any? Not sure? Well, the IRS wants to know!

As most companies are aware, FIN 48 has created the obligation for companies to identify their uncertain tax positions, determine the level of assurance or likelihood that they will or won't withstand audit, appeals and litigation scrutiny. Once that is determined, FIN 48 requires companies to disclose and create a reserve for those uncertain tax positions that reach the more likely than not (51%) threshold. With that said, up until now, this has only been a financial statement reporting standard. Now, the IRS wants to know.

The IRS has released Announcement 2010-9 which is a proposal to create a schedule requiring certain business taxpayers to report uncertain tax positions ON THEIR TAX RETURNS. Supposedly, the schedule will require the annual disclosure of uncertain tax positions in the form of a CONCISE description of those positions and information about their magnitude. The proposal does not require the taxpayer to disclose the taxpayer's risk assessment or tax reserve amounts.

STATE TAX IMPACT????

The schedule would only require disclosure of FEDERAL TAX uncertain tax positions, but what about STATE uncertain tax positions?

If the IRS won't require disclosure of state uncertain tax positions, will the states follow suit and ask for similar disclosures on their returns? It's possible. I guess we will just have to wait and see.

CURRENT STATUS of PROPOSAL

The IRS is currently asking for public comments in response to the Announcement. Comments are due by March 29, 2010.

The Announcement states the new schedule will be required to be filed by a business taxpayer with total assets in excess of $10 million, and be attached to returns filed after the release of the schedule.

Stay tuned for the unveiling of the schedule and when you or your clients will be required to file the new schedule.

Author Comment:

Ahhhhhh, the era of transparency all in the sake of helping the IRS identify what returns to audit, and what tax positions to focus on. And taxpayers were worried about the IRS asking for tax accrual workpapers; skip that. The IRS just wants you to disclose it on the tax return.

COD Income Deferral: What Do The States Think?

2010-01-27T02:00:00.000-06:00

If your company or your client has experienced cancellation of debt (COD) income over the past couple of years, then you are probably aware of the federal income tax legislation that allows taxpayers to defer the income.

Unfortunately, several states have 'decoupled' from the legislation; meaning they will not allow the deferral.

Currently, the following states have decoupled: CT, FL, IN, ME, MD, MA, MN, NJ, NC, OR and RI). More may be on the way.

In addition to the 'decoupling' issue, several state income tax questions come into play when a company experiences COD income.

Is the COD income "business" or "nonbusiness" income?
Should the COD income be included in the apportionment factor?

At this time, most states have not addressed either of these issues. Until they do, companies will be forced to apply general rules and guidelines to reach reasonable conclusions.

For assistance with your company's state and local taxation of COD income, please contact me at brian.strahle@bakertilly.com.

New Jersey: Just Try To Get a Sales Tax Refund!

2010-01-25T02:00:00.002-06:00

New Jersey is proposing to make it more difficult for taxpayers to receive sales tax refunds. What do I mean?

Under a proposed amendment, (N.J. A.C. 18:2-5.8, 42 NJR 56, 1/4/10), the New Jersey Division of Taxation would require taxpayers to submit "sufficient documentation" to allow the division to determine the rationale or basis for the refund to verify the amount of the refund before interest on an overpayment begins to accrue.

What Is "Sufficient Documentation"?

Not sure, but the proposed amendment states a taxpayer must attach documentation to the refund claim form indicating the basis for such claim. You cannot just say that "documentation is available upon request."

In some cases, a taxpayer may need to include copies of each invoice where tax was incorrectly charged, and proof of payment of the entire invoice amount.

No More "Protective Refund Claims"?

The proposal would also not allow taxpayers to file protective refund claims. According to the New Jersey Division of Taxation, there is no statutory authority that requires the Division to allow protective refund claims.

If you have any questions or would like assistance with the filing of a New Jersey sales tax refund claim, please contact me at brian.strahle@bakertilly.com.

How to Withdraw a Business from California: Franchise Tax and Sales Tax Implications

2010-01-22T02:00:00.002-06:00

GENERAL PROCEDURES

From an income tax perspective, a company would generally not be required to confirm with the Board of Equalization or the Franchise Tax Board that they no longer have a taxable presence or legal obligation to file returns. A company would simply need to complete the following steps:

File a final franchise or annual tax return timely, including extension, for the preceding taxable year.
Conduct no business after the last day of the preceding taxable year.
File the appropriate documents with the California Secretary of State (SOS) within 12 months of the filing date of the final tax return.

NOTE: effective September 29, 2006, a tax clearance certificate is no longer required for corporations, limited liability companies (LLC), limited liability partnerships (LLP), limited partnerships (LP), certain exempt organizations, and nonprofit corporations who are going to dissolve, surrender, or cancel their California business entity.

For more info, go to http://www.ftb.ca.gov/businesses/faq/Closing_a_Business_Entity.shtml.

From a sales tax perspective, if a company no longer has a taxable presence in California and has no other legal obligation to collect sales tax, generally, the company may stop collecting sales tax immediately. A company would then need to complete the following:

File Form BOE-65, Notice of Close Out for Seller’s Permit
File Final sales/use tax returns.

For the form and more info, go to http://www.boe.ca.gov/pdf/pub74.pdf.

The above is general advice. Please seek knowledgeable state and local tax counsel to address your specific situation. You may contact me at brian.strahle@bakertilly.com.

Texas: Is Your Contract "Separated" or "Lump-Sum"?

2010-01-20T02:00:00.000-06:00

Is your construction contract "separated" or "lump-sum"? If not sure, your contracts, invoicing and all supporting documents should be clear. According to a recent Texas case, you can't just go by INTENT.

The following is an analysis of the case by Texas Tax Policy News:

According to the Case, the taxpayer provided heating, ventilating and air conditioning (HVAC) contracting services for new construction. The taxpayer entered into a subcontract with a contractor who, in turn, had entered into a contract with a prime contractor performing commercial new construction for the owner of a hotel. The taxpayer did not pay sales tax to suppliers for materials it incorporated into the job. The taxpayer claimed that its contract qualified as a separated contract for sales and use tax purposes, and therefore, it qualified for the sale for resale exemption. The contract, however, stated a lump-sum price.

The taxpayer based its claim on three arguments. First, the taxpayer argued that the contract was a separated contract by its terms, based on precedent established in Comptroller Decision No. 40,445 (2002). In that decision, the disputed contract was held to be a separated contract because the incorporated materials and labor were separately stated in a schedule of values included in a revised bid proposal, which was specifically incorporated by the contract.

In this hearing, however, even though the contract required a statement of values on which to base applications for payment, the contract did not require the statement of values to break out the charges for incorporated materials and labor. Additionally, the taxpayer neglected to provide a copy of the statement of values as evidence. The Comptroller determined that the testimony regarding the statement of values was insufficient to compensate for the absence of the evidence.

Second, the taxpayer argued that the contract was separated because the parties intended it to be separated and treated it as such. The taxpayer initially billed the contractor for sales tax on the incorporated materials. The contractor directed the taxpayer to cease charging tax on the incorporated materials, and provided the taxpayer with a resale certificate for them.

Subsequently, the contractor submitted two change orders, one directing the taxpayer to deduct an amount of sales tax from the original contract amount, another directing the taxpayer to apply a credit in sales tax against the contract amount. Per taxpayer testimony, the taxpayer had charged sales tax on materials only, and the change orders were triggered by the issuance of the resale certificate. Regarding whether these documents served to establish intent, the Comptroller held that intent could not be given any weight under established Comptroller precedent. See Comptroller Decisions 35,473 (1996) and 24,368 (1990).

The Comptroller stated, “The parties' intent cannot override the clear language of the contract providing for a lump-sum contract price.”

Third, the taxpayer argued that the contract was separated because it incorporated the contract between the prime contractor and the owner, which, it claimed, was separated. The Comptroller did not address the argument because the taxpayer neither produced a copy of that contract nor described its provisions.

BOTTOM-LINE

If you aren't sure whether your contract is "separated" or "lump-sum," please contact me at brian.strahle@bakertilly.com to discuss.

Texas: Data Processing or Manufacturing?

2010-01-18T02:00:00.002-06:00

If you've often wondered if your company's activities could be considered "manufacturing" for sales tax purposes in Texas (or other states for that matter), then you will want to read about the following case.

In a recent Texas Case, a taxpayer claimed that certain equipment (such as scanners) used in its business of scanning and imaging documents for its customers was exempt manufacturing equipment. The taxpayer claimed the exemption based on Section 151.318(a)(2) of the Tax Code. The provision exempts equipment that is directly used or consumed in the manufacture of tangible personal property for ultimate sale provided the equipment is both necessary and essential to the manufacturing process and directly makes or causes a chemical or physical change to the product being manufactured for sale.

The Hearing found that the equipment did not qualify for exemption because the taxpayer's sales of scanning and imaging were data processing services and not sales of tangible personal property. A service provider is not eligible for the manufacturing exemption.

The following is an analysis of the case by Texas Tax Policy News:

The taxpayer scanned and imaged various items including bound materials, engineering and large format documents, microfiche, microfilm and magnetic tape, and placed the data in electronic format, such as JPG files and TIFF files, on optical disks such as CD-ROMs. JPG and TIFF files cannot be word (text)-searched, nor can the data in the files be manipulated by the user. But, the taxpayer typically used directory file names that contained a numbered indexing system (for example, 0001.JPG, 0002.JPG, 0003.JPG) which allowed the user to view a particular file by searching for its identifying number in the directory.

The taxpayer claimed that it was a manufacturer selling tangible personal property as opposed to a provider of data processing services. This claim was based on the “essence of the transaction” test. That is, customers paid for, and were primarily interested in receiving, tangible personal property (such as a CD-ROM) produced by the taxpayer.

The taxpayer compared its business to that of a professional photographer selling photographic images, in that the taxpayer imaged documents on a disk or other medium, and charged clients on a per-image basis. Photographers are considered manufacturers of the images they sell. In addition, the taxpayer observed that photocopying machines are viewed as exempt manufacturing equipment, and the copies produced by them and sold are tangible personal property.

The Comptroller turned to the plain meaning and common usage of the term “data” to determine that the taxpayer's transactions were data processing service transactions, not manufacturing. A standard dictionary definition of “data” is “information in numerical form that can be digitally transmitted or processed.”

The result is that charges for entry of even a small amount of data are taxed as data processing services. Moreover, the source of the data is critical. By definition, data processing is a service performed using the customer's data. With data processing, the services performed in connection with the data are primarily valued by the customer, not the medium (tangible personal property) in which the data is received by the customer.

Activities performed by the taxpayer, such as indexing, scanning, data storing and providing data retrieval have long been determined to be taxable data processing services. See Rule 3.330 and STAR 9401L1282B08 for more information.

BOTTOM-LINE

Opportunities do exist to treat activities that you would generally consider "non-manufacturing" as "manufacturing" when it comes to sales tax. Therefore, it pays to continually look for opportunities in this area.

If you have questions regarding your company's activities and if they qualify, please contact me at brian.strahle@bakertilly.com.