THE LEVERAGE SALT REPORT

THE LEVERAGE SALT BLOG IS MOVING!

2015-04-17T09:19:00.000-05:00

I have been blogging since January 2009 and have written almost 800 posts on a variety of state tax topics. As of today, I have updated the site and it is now located at:

www.leveragesalt.com.

All new posts will be written and published on the new site.

All previous 800 posts are still online and will remain available to read at the previous site:

www.leveragestateandlocaltax.com

I want to thank everyone for making my blog the #15th best tax blog in 2015, according to Wallet Hub.

If you are currently subscribed to the blog, you will automatically be subscribed to the blog at the new site location.

Please check out my new site and let me know what you think. I would really appreciate it.

I'm looking forward to continuing to provide you with state tax developments and commentary resulting in practical insights and an independent view.

AMNESTY, THROWBACK RULE REPEAL, MTC TRANSFER PRICING PROGRAM, COMBINED REPORTING, CLICK-THROUGH NEXUS, DIGITAL GOODS ACT AND STATE-OF-THE-STATE ADDRESSES

2015-04-13T16:54:00.000-05:00

I apologize for not posting in a couple of weeks - I have been extremely busy with work and spring break dragged me away a little. In any case, I have put together a list of 7 state tax developments that occurred over the past two weeks that I think you should be aware of.

Notably, the Multistate Tax Commission's new transfer pricing audit program is moving forward nicely and a design draft is scheduled to be reviewed on May 7, 2015.

Two states, Alabama and Louisiana are proposing combined reporting. While Washington and Nevada are proposing to expand the definition of nexus to include click-through nexus (or 'Amazon' nexus).

On the bright side, Indiana proposed a bill to repeal its throwback rule (which COST supports) and Maryland is close to passing tax amnesty.

I have also included a link to the National Governor's Association summary of the 2015 State-of-the-State addresses, and the Tax Foundation's State and Local Sales Tax Rates in 2015 study.

COST supports repeal of throwback rule in Indiana (HB 1349)
Maryland sends Amnesty bills to Governor (SB 763) and (HB 1233)
COST asks Alabama to reject Mandatory Unitary Combined Reporting bill (HB 142)
MTC Transfer Pricing Training Underway / Design Draft to be reviewed on May 7, 2015
Louisiana bill would require combined reporting for some (SB 269)
Washington (HB 2224) and Nevada (SB 382) considering click-through nexus legislation
MTC Sends Letter on Digital Goods Act

STATE TAXES MATTER AND MORE TO COME!

2015-03-31T16:36:00.002-05:00

I want to apologize for not posting as often lately. The past couple of weeks have been crazy leading up to Spring Break. Trying to get things tied down before the break. I'm sure several of you are trying to get things tied done by April 15th!

Unfortunately, I still haven't had time to prepare and write this post on state tax developments like I would prefer. Instead, I wanted to follow-up on the last post regarding WalletHub's Best Tax Blog contest. We didn't win, but I am happy to report that LEVERAGE SALT finished in #15th place. Not bad for a state tax blog. You did it - you made state taxes matter - to some extent. In any case, I want to thank all of you that voted. I greatly appreciate your continued support and relationship. I hope to continue to write about developments and provide you with commentary that is useful and practical.

Over the past few weeks, in addition to client work, I have been working on some new things - some changes and enhancements that are on the horizon. I hope you will stay tuned for the next chapter - and have a great Spring Break (or post 4/15 celebration)!

STATE TAXES DON'T MATTER

2015-03-17T18:40:00.002-05:00

Okay, I just said that to get you to click on this post. I know state taxes matter, but some people don't think so. Their focus is always on federal taxation.

WalletHub is having a 2015 Best Tax Blog contest to rank the top 50 tax blogs. LEVERAGE SALT is on the list. I hesitated in making this request because I think the ranking of my blog by a third party really doesn't matter. However, after I thought about it, I would like a blog about state taxes to beat blogs about federal taxation. On the Internet, it always seems that blogs or articles about federal taxation get all of the attention, especially blogs about individual tax.

I have been blogging about state taxes for over 6 years, almost 800 posts. As a blogger, I sometimes wonder if anyone is listening or does anyone care. Regardless, I have built a loyal following and made connections across the country that I would not have made otherwise. I have a strong e-mail subscriber list and it keeps growing.

MAKE STATE TAXES MATTER

If you believe that state taxes matter and would like to see a state tax blog beat federal tax blogs, I would greatly appreciate it if you would go to this site and vote for my blog. Voting runs through MARCH 23, 2015!!!

VOTE NOW

Thank you very much for your support, not only for this poll, but throughout the past 6 years.

If you are looking for more information about a specific state tax topic, check out:

FIND YOUR ISSUE

2015 RELEASE OF FACTS AND FIGURES: HOW DOES YOUR STATE COMPARE?

2015-03-12T13:40:00.001-05:00

The Tax Foundation recently released its 2015 edition of Facts & Figures: How Does Your State Compare?

Used daily by countless reporters, taxpayers, and legislators, this freely available book is a one-stop data resource for state tax rates, collections, burdens, and more! It's a clear and concise collection of data from a variety of sources and is available in a variety of formats including PDF and XLSX. Print copies will be available for purchase soon!

Go to the Tax Foundation's site to download your free copy.

HOW TO GET INVITED TO THE "PARTY"

2015-03-10T06:33:00.000-05:00

When faced with the obstacles of working with other departments or individuals within your company or firm, and you need their support or "buy-in" to achieve your goals, how do you get it?

Throughout my career and in my personal life, I have always sought to listen first, speak second. Seeking to understand others' perspectives, before I suggest or state my opinion.

In regards to my original question regarding obtaining "buy-in" or support, I usually put myself in the other person's shoes and ask, "what would they want from me?" Why would they invite me "to the party"?

Well, I recently asked myself that question again, and the answer I came up with was, "add unexpected value" and they will invite you. Our initial thought when we feel like others we work with should have gotten us involved, is to barge in, knock on the door, and ask to be invited. But wouldn't a better approach be to provide unexpected value and for them to invite you in?

What do you think? What has been your experience?

U.S. SUPREME COURT QUESTIONS QUILL'S SHELF LIFE

2015-03-05T07:26:00.000-06:00

Don't you hate it when you go into your kitchen pantry for an ingredient or some type of food product, and learn that the product is past it's expiration date? What do you do? Do you take a chance and risk it? Do you use it or throw it out? Do you open it up and smell it to see if it might be okay? Maybe it depends on the ingredient. Well, not unlike the products in your pantry, Justice Kennedy on the U.S. Supreme Court has placed a spotlight on a discussion that was probably inevitable - has Quill outlived its usefulness?

The Supreme Court of the United States decided on March 3, 2015 that the Direct Marketing Association's lawsuit to stop Colorado from imposing information reporting requirements on out-of-state sellers lacking nexus, was not barred by the Tax Injunction Act. Meaning, the lawsuit is not barred, and the case is remanded back to the Tenth Circuit for additional consideration.

DIRECT MARKETING ASSOCIATION v. BROHL, EXECUTIVE DIRECTOR, COLORADO DEPARTMENT OF REVENUE

According to the decision, the Court reasoned that 'information gathering' is not equivalent to 'assessment, levy or collection.' Information gathering is an activity that occurs before assessment levy or collection. Thus, the notice requirements are not part of a state's assessment and collection procedures. Consequently, the Tax Injunction Act does not bar a lawsuit against a state's imposition of information reporting, as it would a lawsuit against a state's assessment, levy or collection activities.

Despite this apparent victory for the Direct Marketing Association and remote retailers, Justice Kennedy gave remarks in his concurring opinion that insinuates a challenge to current Commerce Clause jurisprudence could change the face of multistate taxation entirely.

In his opinion, he stated there is a "continuing injustice" on states caused by Commerce Clause jurisprudence requiring a business to have a physical presence in a state before being required to collect sales tax from customers (National Bellas Hess, Inc. v. Department of Revenue of Ill.,386 U. S. 753 (1967). Quill Corp. v. North Dakota, 504 U. S.298, 311 (1992)).

He comments that due to the depth at which our world is connected and business is conducted, "a business may be present in a State in a meaningful way without that presence being physical in the traditional sense of the term." As a result, Quill "should only be left in place only if a powerful showing can be made that its rationale is still correct."

What will happen next?

Will this provide extra traction to the passage of the Marketplace Fairness Act?

Will we see a court case challenging Quill?

Will other states attempt to impose information reporting requirements similar to Colorado?

Only time will tell.

9 STATE TAX DEVELOPMENTS YOU NEED TO KNOW

2015-02-21T09:13:00.001-06:00

The following 9 developments reflect the main areas of controversy in multistate taxation: apportioning service income, definition of nexus, taxation of remotely accessed software, combined reporting, the Multistate Tax Compact apportionment election, alternative apportionment and the need for independent tax tribunals.

Massachusetts Governor signs and enacts 60-day Amnesty program (H 52). Terms and scope of amnesty yet to be determined.
South Carolina administrative law judge finds South Carolina is not a strict cost-of-performance state (Docket No. 14-ALJ-17-0285-CC; Dish DBS Corp. v. Dep't of Revenue).
Tennessee Governor proposes market-based sourcing, expanding definition of nexus and the taxation of remotely accessed software (HB 644).
Kentucky introduces legislation to require unitary groups to file water's edge combined returns, adopt market-based sourcing, implement a sales factor throwback rule, and create reportable transaction disclosure requirements (HB 374).
Texas is bombarded with separate pieces of proposed legislation aiming to extend alternative rates, permanently reducing franchise tax rates, or phasing out the franchise tax until it is repealed (HB 1315, HB 1316, HB 250, HB 321).
North Dakota Senate approved legislation to repeal Multistate Tax Compact and reenact it without the Article III election and also phase in a single sales factor apportionment election (SB 2292).
Vodafone Americas filed brief with Tennessee Supreme Court in alternative apportionment case in response to an amicus curiae brief filed by the Multistate Tax Commission (Vodafone Americas Holdings Inc. v. Roberts; No. M2013-00947-SC-R11-CV).
COST writes letter to support legislation (SB 5449) to create an independent tax dispute forum (a "tax appeal division") within the Washington State Court of Appeals.
Duel Tax Burden of S Corporations - report and map from Tax Foundation.

What are your areas of concern? Which development will impact your clients the most?

What development did you follow last week that is not listed above?

SIDEBAR: I am offering a new unique service to CPA and law firms called, "Integrated Intelligence." I would greatly appreciate it if you would take a look and give me some feedback regarding the service. Thank you.

14 QUESTIONS YOU MUST ANSWER

2015-02-18T20:59:00.001-06:00

Someone I know answered the following questions in an interview recently, and I thought it would be a good exercise to complete myself. It made me pause and think about my career and influences in my life. Please take a moment and answer the questions for yourself. Feel free to share them as a comment to this post or e-mail me.

Birthplace: Central Illinois
Education: bachelor's degree in accounting, Millikin University; masters degree in taxation, Washington School of Law
Career: 20 years including working in multiple public accounting firms (Big 4, national and regional), and Fortune 500 companies
Best Career Move: joining RSM McGladrey's National Tax Office, which involved moving from Illinois to Minnesota; second best career move (moving south to Virginia away from the cold in Minnesota) - for more on my career path, check out my LinkedIn profile.
Career Goals: to transform multistate tax complexity into practical solutions and positively impact multistate tax policy for all businesses; I want to make a difference with what I do and I want to have fun doing it.
Best advice ever received: this is a hard one. I have received some good advice from a variety of people throughout my career. I am also a quote magnet, so I have lots of mantras or sayings I use on a daily basis. For example, adapt, improvise, overcome. Be you, expect success and live one day at a time. Early in my career, I did more than what was expected on a project. My supervisor was happily surprised and told me that I would be successful in my career if I always kept that mentality of doing more than what is expected. It has stuck with me to this day.
Most difficult situation faced on the job: being given responsibility without authority to act.
Career tip for students: I believe you are responsible for your success. You can't rely on other people or wait for others to do something. You must take the initiative. Take daily steps towards your goals. Success or reaching your dream does not happen overnight. There will be many twists and turns along the way. It most likely won't go according to your plan, but if you persist and do the work, you will eventually reach your destination.
Role models: I would have to say my dad. My dad worked 45 years at one company straight out of high school. He didn't have a college education but worked his way up from the mail room. The last 10 years of his career, he didn't receive a raise. He really didn't like his job, but he couldn't leave. He had so much time built up at the company and he didn't have a college degree. He felt trapped. My dad died in 2008 from lung cancer. He never smoked a day in his life. The doctor said it was second-hand smoke. They used to let people smoke in the office and they did where my dad worked for probably 20 years of his career. Several of his coworkers who did smoke died of emphysema. My dad worked hard and provided for his family. He saved for retirement and was able to spend six years after retiring with my mom before he died. He is my role model and motivation for not being trapped in a job and working hard to succeed.
Family: wife and two daughters, plus a little shih tzu named Fergie
Pastimes: spending time with my family, addicted to fitness, music, playing drums and learning guitar
Most memorable book: I have several favorites, but I would probably have to say "Tribes" by Seth Godin because it was one of the drivers that compelled me to start my state tax blog back in 2009.
Favorite restaurant: don't really have one; but I like unique, restaurants that make you feel like you are somewhere else, and have great food.
Ideal vacation: We have been to Hawaii 3 times and have had vacations at several beaches and mountain locations across the U.S. Thus, an ideal vacation includes beauty and relaxation.

INDIANA: WHERE IS YOUR SERVICE 'RENDERED'?

2015-02-16T14:33:00.000-06:00

Indiana only cares about where the sale of a service is ‘rendered.’ Costs-of-performance does not matter.

A recent Letter of Finding held that an out-of-state company’s income from providing online educational services earned from Indiana students should be sourced to Indiana because the sourcing is based on where the sale is 'rendered,' not based on the costs-of-performance that the taxpayer incurred outside Indiana.

INCOME-PRODUCING ACTIVITY

Indiana law defines “income producing activity” as the act or acts directly engaged in by the taxpayer for the ultimate purpose of obtaining gains or profit. In the Letter of Finding, the state held that the 'sales to Indiana customers' were the acts directly engaged in by the taxpayer for the purpose of obtaining gains or profit, not the product development and information technology costs the taxpayer incurred outside Indiana.

According to Indiana, the taxpayer does not earn money from hiring or training its faculty members, from developing online courses or course materials, or from incurring local overhead expenses. The taxpayer does not earn money because its Indiana online students pay the taxpayer to incur out-of-state expenses or conduct out-of-state research or development activities on those students' behalf. The taxpayer earns money because it prepares online educational services and then sells those services to Indiana customers within their home state.

SOURCING

According to Indiana, the issue is not the cost of the development of the educational services; rather the question is the destination of sales through provision of services.

According to Indiana law, the income producing activity is deemed performed at the situs of real, tangible and intangible personal property or the place where personal services are rendered. The word “rendered” means to transmit or deliver. Consequently, Indiana believes sales are obtained because services are ‘rendered,' and services are rendered where the customer is located.

INTERESTING STATEMENT

According to the Letter of Finding, “formulary apportionment is designed to align the income tax multistate taxpayers report to the states in which they conduct business with that taxpayer's business activity conducted in those states. Formulary apportionment is not designed to create income untaxed by any state or to exclude money earned from Indiana business activity from the Indiana sales numerator.”

PROBLEMS WITH INDIANA'S TREATMENT

If we accept Indiana's conclusion that the taxpayer earns money because it prepares online educational services and then sells those services to Indiana customers within their home state, then it seems that the activity of "preparing" and the activity of "selling" are one income-producing activity. The taxpayer can't have revenue in Indiana without the preparing or the selling. As a result, the income producing activity related to the Indiana sale occurred partly within Indiana and partly without Indiana. Based on Indiana statutes and regulations, this requires the taxpayer and Indiana to use the costs of performance method.

Is the actual 'rendering' of the service in Indiana? Indiana regulations and statutes provide that gross receipts for the performance of personal services are attributable to this state to the extent such services are performed in this state." The statute or regulation does not define "rendered' as "transmit or deliver" as mentioned in the Letter of Finding. Consequently, Indiana may be the 'receipt' of the service, but the actual rendering, delivering or performance may occur outside Indiana, in this case by a professor. Or if we want to say the service was transmitted via a server, where the server is located. Saying a service is 'rendered' where the customer is located is not accurate. That is why states have gone to a 'market-based' sourcing method versus income-producing activity and costs-of-performance method. Meaning, a 'market-based' sourcing method would allow Indiana to source sales of services based on where the customer is located. However, this is not Indiana law.

ACTION STEP

Companies who provide services or sell online services to customers in Indiana should re-examine the apportionment and sourcing methodology they utilize to file their Indiana income tax return.

FINAL COMMENT
Indiana has had several Letter of Findings that have ruled in similar fashion, supporting Indiana's point of view. I disagree with Indiana's view point; however, taxpayers should be cautious in taking an opposing position without considering the potential result.

TAXPAYERS MUST REVISIT STATE TRANSFER PRICING STUDIES

2015-02-11T06:19:00.000-06:00

A recent post entitled, "MTC Puts Designs on Increasing State Transfer Pricing Revenues," by A. Tracy Gomes, Stephen P. Kranz and Diann Smith on the Inside SALT blog from McDermott Will & Emery, discusses the Multistate Tax Commission's Arm’s Length Adjustment Services (ALAS) program.

The post discusses the program's planned approach and objectives which involve the utilization of contract consultants and 'new and improved' audits of intercompany transactions and transfer pricing study documentation starting at the end of 2015.

State Assumptions
As I read the post, I took note of the following assumptions and beliefs for investing in such an endeavor:

The states are missing out on $20 billion in revenue
Interstate income shifting is widespread
Taxpayers are manipulating the system and do not have supportable transfer pricing documentation for intercompany transactions
Transfer pricing studies are complex.

Are these assumptions correct?

Note: when solving any problem, the key is to ask the right questions upfront. Asking the wrong questions or making wrong assumptions will lead you down the path of wasting time and resources.

Complexity Requires Contract Consultants
The program is planned to utilize MTC in-house professionals and contract consultants to complete the 'advanced economic and technical analysis' of taxpayer transfer pricing studies. The explanation for using contract consultants is because transfer pricing studies are so complex they require specialized expertise.

I wonder how the 'contract consulting expertise' will be paid, and what their incentive will be? What are the chances that the 'contract consultants' determine that taxpayer studies are correct?

Note: as in all areas of taxation, complexity breeds ambiguity, scrutiny (fair or unfair), abuse, opportunity and litigation.

The MTC's new program is sure to create more controversy and litigation.

Bottom Line
The use of contract economic expertise to examine taxpayer transfer pricing studies should cause taxpayers to revisit their transfer pricing documentation before it's too late.

For more information, check out my previous post:

STATE TRANSFER PRICING MEETS THE 'ADJUSTMENT BUREAU' (ARMS-LENGTH ADJUSTMENT SERVICE)

ORIGIN SOURCING, TAX HAVENS, ALTERNATIVE APPORTIONMENT, COMBINED REPORTING, FEDERAL TAXATION AND SINGLE SALES FACTOR?

2015-02-06T13:12:00.001-06:00

This week's state tax developments highlight the continuing emphasis on the states' focus on combined reporting, single-sales apportionment, market-based sourcing, preventing tax arbitrage through tax havens, taxpayer struggles to win Multistate Tax Compact apportionment election cases and the ongoing saga of trying to find a workable solution to the remote seller/online use tax collection problem (the problem may be that we haven't asked the right questions; thus, we aren't getting the right answer).

Top Developments This Week

Goodlatte's Hybrid Origin-Sourcing Bill for remote sellers (online) sales taxation - everybody has an opinion, but a realistic, acceptable solution remains at bay. NCSL; Seven Deadly Sins of Origin Sourcing; COST; Multistate Tax Commission; NetChoice; ACMA;
IBM Corp. and business taxpayers involved in 33 appeals of a Michigan trial court judge's dismissal of their challenges to the state's retroactive repeal of the Multistate Tax Compact have joined forces; the taxpayers seek consolidation of their cases (as reported by Tax Analysts)
Oregon wanting to add to list of tax havens (HB 2099); COST opposes.
Tennessee bills (SB 324; HB 213) would change apportionment formula to more heavily weight sales factor
COST and Vodafone file briefs in Tennessee alternative apportionment case
Maryland senator files combined reporting bill (SB 179)
Multistate Tax Commission is drafting market-based sourcing regulations to produce 'harmony' (the rise of economic nexus, taxing based on sales and encouraging jobs and investment)
Virtual Currency - issues and taxation???

Federal Taxation and Single-Sales Factor Apportionment??
Another interesting development is that I received an invitation to attend a meeting entitled, "The Project for Corporate Tax Fairness." The meeting will be held Tuesday, February 10, 2015 in Washington D.C. The focus of the discussion is on how the single sales factor apportionment formula could be used for the federal income tax - interesting. For more info, visit SalesFactor.

MY TOP 5 STATE TAX DEVELOPMENTS FROM LAST WEEK

2015-02-02T18:23:00.002-06:00

Tax Incentive Programs Under Review - 10 states and the District of Columbia have passed laws to require economic development tax incentives to be regularly evaluated. Lawmakers want to know whether their incentives are worth the investment. Seems odd that they needed to pass a law to do this - isn't it common sense to do a cost/benefit analysis??
New York City Tax Reform To Follow New York State - see 2015-16 New York State Executive Budget Revenue Article VII Legislation, part QQ, Corporate Tax Reform, page 314.
Washington State Issues Advisory to Clarify Decision is Not Departure From Established Law - the Washington State Court of Appeals issued a decision in Getty Images, addressing the taxability of amounts received by a parent company from affiliates to pay costs for providing administrative and management services to those affiliates. The advisory asserts that compensation for services is subject to the Business and Occupation (B&O) tax regardless of whether the services are provided by an affiliate or by an unrelated person. However, bona fide dividends or distributions from a capital account may not be subject to B&O tax. Take-away: the facts in each case will determine whether the payments between affiliates are for services or nontaxable transfers of funds.
Texas Says Statute of Limitations Can Be Extended for Assessments, Not Refunds - in the ruling by the Texas Comptroller, the taxpayer was requesting a refund outside the general statute of limitations claiming that the 25% 'gross error' exception to the normal statute of limitations which allows Texas to issue assessments beyond the 4 year statute of limitations should also apply to refund claims filed by taxpayers. The taxpayer had overreported its income by more than 25%. Thus, the taxpayer claimed it met the 'gross error' exception. The Texas Comptroller ruled that the 'gross error' exception only applies when the taxpayer has under-reported its income by more than 25%. Texas law defines 'gross error' to mean that, after correction of the error, the amount of tax due and payable exceeds the amount initially reported by at least 25%. Consequently, no two-way street.
Taxpayer Multistate Tax Compact Cases Continue in Texas and Michigan. Texas Attorney General filed its 156-page brief in the Texas Court of Appeals and argued that it is not settled that the Compact is binding on its member states. In Michigan, the Court of Appeals refused to issue a ruling because the lower court has not yet determined whether the retroactive repeal of the Multistate Tax Compact by Michigan applies to the case. Consequently, the Court remanded the case back to the trial court. The settlement of this issue has implications for other compact cases in Michigan litigation.

What are your top 5 developments from last week?

CLOUD COMPUTING, PRACTICALLY SPEAKING

2015-01-29T16:58:00.001-06:00

If you are a subscriber to Tax Analysts' State Tax Notes, and are interested in learning a 'practical approach' to complying with the sales taxation of cloud computing, please check out my article that was published this week entitled, "Cloud Computing, Practically Speaking."

In my article, I focus on the taxation of Software-as-a-Service (SaaS), and summarize how states treat it by segregating the states into the following groups:

States With Specific Guidance - Taxable
States With Specific Guidance - Not Taxable
States With Specific Guidance - Don't Download
States Using General Guidance - No Transfer of Tangible Personal Property
States Using General Guidance - Taxable
States With Intricate Rules - It Depends

I end the article with a list of 'practical considerations' and an approach that taxpayers can implement today, as they are faced with the task of avoiding compliance errors or overpaying tax.

WHAT TYPE OF EVIDENCE DO YOU NEED?

2015-01-26T05:00:00.000-06:00

If you are not a lawyer and you work in the state tax field, over time, after reading court case after court case, you begin to learn what different legal terms mean. If you have read any articles or statutes and regulations regarding the burden of proof taxpayers or departments of revenue must meet when proposing alternative apportionment, you have probably read the terms:

Preponderance of Evidence
Clear and Convincing (or Cogent) Evidence

But what do these terms mean?

Preponderance of Evidence

The preponderance of evidence standard is met if the proposition is more likely to be true than not true. Effectively, the standard is satisfied if there is greater than 50 percent chance that the proposition is true.

For example, in Mississippi, starting January 1, 2015, the commissioner may require a taxable corporation that is affiliated with one or more corporations that are not taxable to file a combined return with the affiliated corporation or corporations if he establishes by preponderance of the evidence that the intercompany transactions of the taxable corporation have resulted in the shifting of taxable income from itself to another member or members of its affiliated group not subject to tax. The commissioner may also require a taxable group of affiliated corporations to file a combined return if he establishes by preponderance of the evidence that the intercompany transactions of the corporations have resulted in the shifting of taxable income between members of the affiliated group.(Miss Code Ann Sec. 27-7-37(2)(a)(ii))

Clear and Convincing Evidence

Clear and convincing evidence is a higher level of burden of persuasion than "preponderance of the evidence."

Clear and convincing proof means that the evidence presented by a party during the trial must be highly and substantially more probable to be true than not and the trier of fact must have a firm belief or conviction in its factuality. In this standard, a greater degree of believability must be met than the common standard of proof in civil actions, which only requires that the facts as a threshold be more likely than not to prove the issue for which they are asserted.

This standard is also known as "clear, convincing, and satisfactory evidence"; "clear, cognizant, and convincing evidence"; and "clear, unequivocal, satisfactory, and convincing evidence", and is applied in cases or situations involving an equitable remedy or where a presumptive civil liberty interest exists.

For your reference, the following is a sample list of cases that have discussed the level of evidence necessary to meet the burden of proof:

Equifax, Inc. v. Mississippi Dep’t of Revenue, No. 2010-CT-01857-SCT (Miss. 2013)
CarMax Auto Superstores West Coast, Inc. v. South Carolina Department of Revenue, Docket No. 4953 (S.C. Ct. App. 2012)
Microsoft v. Franchise Tax Board, 139 P.3d 1169 (Cal. 2006)
British Land (Maryland) Inc. v. N.Y. Tax App. Trib., 85 N.Y.2d 139, 147-48 (N.Y. Ct. App. 1995)

Note: the definitions were obtained from "legal burden of proof" - Wikipedia. Other sources provide similar definitions.

STATE BUDGET UPDATE: COLLECTIONS AND EXPECTATIONS

2015-01-23T11:21:00.000-06:00

The National Conference of State Legislatures, a bipartisan organization that serves the legislators and staffs of the states, commonwealths and territories, recently released their Fall 2014 State Budget Update.

The report is based on data collected in the fall of 2014 from legislative fiscal officers in all 50 states and the District of Columbia. It includes information on:

State revenue performance;
Areas of spending over budget; and
A summary of state fiscal situations.

The report asserts that revenue collections are meeting expectations in a majority of states, with 35 states and the District of Columbia expecting to meet their revenue forecast by the end of FY 2015 (some states met their expectations by lowering them).

Six states expect to miss their revenue projections: Alaska, Arizona, Kentucky, Massachusetts, Michigan and Vermont.

Five states are likely to exceed their revenue forecast: Georgia, Maryland, Oklahoma, Texas and Utah (that's only 5 states).

One key point that stood out to me is, on average, corporate income taxes make up only 5 percent of state tax collections. Personal income taxes make up about 37 percent and sales taxes make up about 30 percent.

Will the focus continue to be on growing the sales tax base and collections or will the focus shift to corporate income taxes?

If states focus on collecting sales tax from remote retailers, the sales tax percentage of state tax collections will rise further. Is that a good thing for state governments and taxpayers?

Check out the condensed version of the report for a quick summary.

Stay engaged because today matters.

ONLINE SALES TAX SIMPLIFICATION: AN INDECENT PROPOSAL

2015-01-20T20:26:00.000-06:00

Representative Bob Goodlatte of Virginia has circulated a draft of a proposal to simplify the sales taxation of remote sellers. His proposal attempts to tax remote sellers using 'origin sourcing' instead of the current statutory, commonly accepted 'destination sourcing' used by all states. Under his proposal, a state would tax a remote sale only if it is an 'origin' state, and the state is party to a Distribution Agreement. In simplistic terms, under the Distribution Agreement, 'origin' states would submit sales information to a newly created "Multistate Commission," that would in-turn distribute the sales tax collected by the 'origin' state to all of the states where the purchasers are located based on the information provided by the 'origin' state.

In the proposal, there is additional guidance and detail regarding tax rates, exemptions, using the 'origin' or the 'destination' state's rules, how to apply the proposal to states that do not impose a sales tax, privacy protection, foreign sales, a new resale certificate, etc.

Regardless of the details, the proposal at first blush seems like a decent idea. However, if you take the time to read the proposal and dig through the minutiae, you may start to get an uneasy feeling. That uneasy feeling may come from the following:

Do state governments and taxpayers want some taxpayers following 'destination' sourcing and some taxpayers following 'origin' sourcing?
Do state governments want a federal law mandating how they are going to share revenue?
Do state governments and taxpayers want another layer of bureaucracy (i.e., a 200 member multistate commission) making decisions?
Do state governments really want to 'share' revenue, when all they seem to really want to do is compete against each other for business and tax revenue?
Is it realistic to believe that Congress can create a set of 'common rules' that the states can agree on? (i.e., see Streamlined Sales Tax Project or the current Multistate Tax Commission)
We currently have almost 50 states imposing sales tax on different items, with different exemptions, different tax bases, etc., and the federal government thinks it can solve it with one piece of legislation?

I could go on, but you get the picture.

Will this proposal start a discussion that will lead to a productive and realistic solution that won't cause substantial fallout? Will the ongoing fight between brick and mortar stores, and remote sellers decrease or increase in 2015?

Will the federal and state governments, along with retailers, find a solution that is constitutional, workable, agreeable and utilizes current law?

It has been said (and therefore, I will say it again), sometimes we don't need new laws to solve a problem. We just need to enforce current law.

For additional write-up on the proposal, see PricewaterhouseCooper's Tax Insights.

For media, see Bloomberg News article.

For past posts on Marketplace Fairness Act, click here.

GRANT THORNTON VS. PRICEWATERHOUSECOOPERS

2015-01-14T08:50:00.000-06:00

Grant Thornton issued its lengthy write-up of the SALT Top Stories of 2014. Here is my listing of the topics discussed.

Single Sales factor apportionment
Market-Based Sourcing
Improved State Budgets
Expanding the boundaries of the imposition of Nexus
Attempting to capture remote seller retailers in the web of sales tax collection
Multistate Tax Commission (MTC) busy defining key principles of state income taxation
Controversy over the availability of the 3-factor apportionment election
Alternative apportionment decisions in Mississippi, Tennessee (and South Carolina)
New York tax reform
Rhode Island adoption of combined reporting
MTC action on 'transfer pricing'
Marketplace Fairness Act (still in progress)

PricewaterhouseCoopers released a 2014 Year-End State Tax Review and Look Ahead to 2015. PwC covered many of the topics that Grant Thornton did, but also provided additional insights.

Businesses are transforming their state tax functions and adopting technology solutions
States are increasing their focus on U.S. inbound companies and foreign corporations
Employment / payroll tax
Credits and incentives
Abandoned and Unclaimed Property

PwC also provides an index with links to Alerts they released throughout 2014 (nice feature).

Overall, multistate taxes are in a constant 'state of alteration,' ever-changing. The daily explosion of new developments forces taxpayers to keep watch, scrutinize the minutiae of legislation and court decisions, and adapt.

What do you think was the most important development of 2014? What will be the biggest development in 2015?

If your firm has a state tax development summary, alert or review, I would love to read it. Please send it me.

6 YEARS OF BLOGGING | 2015 ASPIRATIONS | TOP POSTS SINCE 2009

2015-01-10T07:43:00.001-06:00

Today marks my 6 year anniversary of blogging - can't believe it. I started this blog on January 10, 2009 not knowing if anyone would read it or how long I would do it. To date, I have written 774 posts - this being the 775th post.

After 6 years, I can truly say it has been worth it. The creative outlet, the connections. My thought process back then was - for my profession, I have to read and stay up on state tax developments on a daily basis, so why not identify what I think are the most important things and communicate those in my own way. If you think about it, that is what state tax consultants do when they go to a client.

(For more info regarding my experience with blogging, see Bloomberg Interview and the 700th post)

As we start 2015, I am focusing on 'quality, not quantity' and changing 'perspectives.'

Specifically, I am trying to impose the "LESS IS BETTER" mantra in many areas of my life. Less clutter in my house, cleaning out my office, closets, storage rooms, etc. Stop keeping things that you haven't used or create that 'out of control' feeling. After cleaning up my office, closets, and storage room over the past couple of weeks, I can honestly say I feel more in control, more focused. My office is more welcoming when it is clean. In my career, I want to do more by focusing on less. I want to build quality connections in my profession and personal life. Not just quantity (more to come on this in future posts).

In regards to changing perspectives, it began last week when I changed the direction of my desk and rearranged other furniture. By changing the way I am facing, I changed my viewpoint or PERSPECTIVE of the room. It actually made me think about my work differently and gave me more motivation to work. Sometimes we don't need a new room, new car, new 'whatever.' We simply need to change our position to obtain a new vantage point. It may change our thinking and breathe new life into the situation or us.

I hope that in 2015, you find success in your career and in life. Perhaps you could benefit from implementing the "less is better" approach or by changing your perspective.

Some of the Top Blog Posts Since I started 6 years ago:

SOUTH CAROLINA SUPREME COURT CASE PROVIDES CLARIFICATION AND TAXPAYER VICTORY??

2014-12-29T08:49:00.000-06:00

Last week, the South Carolina Supreme Court ruled in the taxpayer's favor in a long awaited alternative apportionment case - CarMax. The ruling clarified several issues which appear to be positive for all taxpayers with alternative apportionment issues in South Carolina. However, some conclusions may have been reached simply because of the way the South Carolina Department of Revenue handled the case.

First, let's look at the positives. The S.C. Supreme Court clarified the following:

When a party seeks to deviate from the statutory apportionment formula, the proponent of the alternative formula bears the burden of proof.
The party must meet that burden of proof by a preponderance of the evidence.
The party must prove that the statutory apportionment formula does not fairly represent the taxpayer's business activity in South Carolina, AND that the alternative method is reasonable.
The party is NOT required to prove that the alternative method 'more fairly' represents the taxpayer's business activity in South Carolina.

Why did the Department lose?

The Department erred in placing the burden of proof on CarMax when the Department was the party deviating from the statutory apportionment formula.
The Department failed to prove that the statutory formula does not fairly represent the taxpayer's business activity in South Carolina. It appears the Department was so focused on placing the burden of proof on CarMax, that it didn't provide sufficient evidence to prove the statutory method did not provide a fair representation of CarMax's activity in South Carolina.

The South Carolina Supreme Court could have remanded the case to allow the Department to provide additional evidence to prove that the statutory formula was not fair, but the Court did not. The Court simply ruled that the Department did not satisfy its burden of proof.

The Court also noted that simply because an alternative method produces a greater apportionment percentage or more tax, it is not sufficient evidence to support deviating from the statutory formula.

BEWARE

Now that the Department knows where the burden lies, it may be able to be successful in other alternative apportionment cases if it provides sufficient evidence. Consequently, the CarMax case is a victory for CarMax and a clarification for the rest of us. That clarification could be a positive or a negative depending on the facts of each case.

Prior posts on CarMax.

Prior posts on alternative apportionment.

RHODE ISLAND PROVIDES COMBINED REPORTING INSIGHT

2014-12-23T05:00:00.000-06:00

The Division of Taxation has issued draft regulations to implement mandatory unitary combined reporting for Rhode Island corporate income tax purposes which is effective for tax years beginning on or after January 1, 2015. Draft Reg. CT 15-XX, Rhode Island Division of Taxation.

Previously, to assist C corporations and their advisers in complying with the requirements of pro forma combined reporting, the Division of Taxation in 2011 issued Regulation CT 12-15, “Combined Reporting (pro forma)." The Division of Taxation has carried forward a number of elements of Regulation CT 12-15 into the draft regulations.

The draft regulations provide insight into Rhode Island's combined reporting methodology. For example, according to the draft regulations, Rhode Island will require a 'waters-edge' return, follow the Finnigan rule for apportionment and permit net operating losses created by entities prior to filing a combined return to only be utilized by the entity which created the loss.

Affiliated groups of corporations doing business in Rhode Island should review the draft regulations in detail to prepare and plan for combined reporting.

INDIANA: WATCH YOUR 'THROWBACK'

2014-12-22T05:00:00.000-06:00

Indiana's throwback rule applies unless the taxpayer has nexus in the other state and the jurisdiction to tax exceeds the protection of P.L. 86-272. Letter of Findings: 02-20140293, November 26, 2014.

According to Indiana, if a taxpayer is not taxable in the state of the purchaser, the sale is attributed to Indiana if the property is shipped from an office, store, warehouse, factory, or other place of storage in Indiana. Such sale is termed a “throwback” sale. Indiana law also provides that a corporation is “taxable in another state” when such state has jurisdiction to subject it to a net income tax.

Example: The taxpayer has its head office and factory in State A. It maintains a branch office and inventory in Indiana. Taxpayer's only activity in State B is the solicitation of orders by a resident salesman. All orders by the State B salesman are sent to the branch office in Indiana for approval and are filled by shipment from the inventory in Indiana. Since the taxpayer is immune under P.L.86-272 from tax in State B, all sales of merchandise to purchasers in State B are attributed to Indiana, the state from which the merchandise was shipped.

The taxpayer in the Letter of Findings engaged a salesperson, who lived in California and used the taxpayer's laptop to perform activities, including preparing quotations, following up quotation, and gathering data during the quote follow-up. All the customers' orders were required to be approved by taxpayer's Indiana office. Thus, the nature of the salesperson's activities in California was closely related to the eventual sale of a product. According to the Indiana Department of Revenue, the taxpayer's supporting documentation showed that its business activities in California did not go beyond solicitation and as a result, were protected under P.L. 86-272. Therefore, sales to California customers were required to be thrown back and included in the numerator of the Indiana sales apportionment factor.

REMEMBER

Each state that has a throwback rule has it's own definition or standard for what makes a taxpayer 'taxable in another jurisdiction.' Consequently, please consult the applicable state's laws when attempting to determine the proper treatment.

JUST SAY "NO" TO COMPLEXITY (CLOUD COMPUTING TIPS INCLUDED)

2014-12-12T11:48:00.000-06:00

My favorite part of the Matrix movie is at the end, when 'Neo' gets shot and killed, but then comes back to life. He stands up and realizes he is 'The One,' with more strength and power than before. The opposition (3 guys) are amazed by this and immediately shoot their guns at him. Neo simply raises his hand and says, "No." The bullets stop in mid-air and he picks some of them by hand. The rest fall to the ground. I just love it.

Now, my wife is not too keen on the Matrix movies, and I must admit, it is a weird concept. I could do without some aspects, but the movie does have some cool features and meaning (if you are willing to look for it).

In an attempt to apply this to the state tax realm, I would argue that the opposition taxpayers face is not state government officials or state auditors. The opposition is 'complexity.'

For example, some laws are written vaguely creating uncertainty in how to comply or plan. Some laws are later proven to be unconstitutional causing taxpayers to wonder if they can obtain refunds or will be caught carrying the 'tab.' New technologies and ways of doing business such as the 'Internet' causing states to attempt to expand nexus standards and attempt to impose sales tax collection obligations on out-of-state companies with no physical presence.

Or let's take, 'cloud computing.' States are still playing catch-up with guidance on how it should be taxed for sales tax purposes. Is 'cloud computing' treated as software, a service, tangible personal property, intangible property, a lease of tangible personal property, data processing services, information services, or telecommunication services?

To alleviate the confusion and complexity, I am providing the following list of questions as a tool. Obtaining the answers to these questions will help determine if the 'cloud computing' a company is purchasing is taxable when state-by-state research is conducted.

Mode of delivery?

Remote access only?
Downloaded to customer server or computer?
Receipt of tangible personal property (i.e., disk, cd, hardware, etc.)?
Required to lease or purchase hardware?

Location of users?
Location of vendor server?
Location of customer server and/or computer to which software is downloaded (if applicable)?
What is the ‘true object’ or ‘dominant purpose’ of the purchase?

“Access” to software only? (i.e., access database to obtain information; no calculation, no input; information compiled and provided by vendor, ‘information service’)
“Use” software? (i.e., input data, manipulate data, calculate results, store data; manipulation of data by customer)
Receive “service”? (i.e., data processing (manipulation of customer information by ‘Vendor’)
Access to storage on vendor’s hardware?
Access to vendor’s platform w/tools so customer can create something?
Access to vendor’s computers on a time-sharing basis?

Cloud computing contracts can be one of a company's largest recurring expenses, year after year. Consequently, companies should not assume the vendor is handling the sales tax correctly. Companies should also not be afraid of the 'opposition' or complexity. Companies should develop an approach (like the above questions) to manage and simplify the complexity, allowing companies to merely say, "No."

For past posts on cloud computing, go here.

HAPPY THANKSGIVING! (GOBBLE, GOBBLE)

2014-11-26T15:50:00.000-06:00

I just wanted to take the time to say thank you, thank you, thank you for supporting my blog. I truly appreciate you, taking the interest and time to stop by. I want to especially thank all of my e-mail subscribers - you support me and let me know that I'm not doing this in vain.

I am extremely thankful this year, as I just finished my first year of being self-employed, and I must say, it has turned out better than I could have imagined - better than if I sat down, and drew it up on paper myself. I am truly blessed.

I hope everyone enjoys Thanksgiving with family and friends and is able to stop and breathe. Life is short, maximize the moments.

Be safe. Be blessed.

If you are interested in receiving leverage via e-mail, please go here to subscribe. I would so appreciate it!