Biographical Information Britte Stein, Senior Tax Manager of - - PDF document

▶

Sep 02, 2022 416 likes •662 views

- Workshop

SLIDE 1

Workshop PP

California Dreaming: Tax Issues for Ohio Companies Doing Business in California

Wednesday, January 29, 2020 2:00 p.m. to 3:00 p.m.

SLIDE 2

Biographical Information

Britte Stein, Senior Tax Manager of Compliance and Tax Accounting, Grief, Inc. 425 Winter Rd., Delaware, OH 43015-8903 740-657-6550 Britte.Stein@Greif.com Britte has a Bachelor of Science in Accounting from University of Southern Indiana. She received her CPA in 2005. Britte started her tax career in public accounting for 5yrs. Then moved into the private sector where she worked as Senior Tax Accountant for Steel Dynamics, Inc. her main responsibilities were compliance and tax provision for 5yrs before moving to Zimmer Biomet, Inc. and was promoted to Corporate Domestic Tax Manager for 3yrs. Britte currently works for Greif,

Inc. as Senior Tax Manager of Compliance & Tax Accounting since December 2015 and she is

responsible for the overall consolidation of the company’s domestic/international financial results. As such, part of her responsibility is overseeing all domestic compliance, along with international/domestic provision and tax accounting. Ligia Machado, Partner, PricewaterhouseCoopers LLP 400 Capital Mall Ste. 600, Sacramento, CA 95814 Mobile: (530) 306-1355 ligia.l.machado@pwc.com A tax partner in PwC’s California State and Local Tax (SALT) practice, Ligia Machado is widely recognized as one of the top experts in the country with regard to California franchise tax consulting and controversy. Ligia's clients are large multistate and multinational corporations spanning a variety of industries, including financial services, telecommunications, industrial and extractive. Since joining PwC in 2001, Ligia has played a leading role in helping clients navigate through the decision-making process related to California compliance and reporting issues. Ligia has assisted many of the largest corporations in the world resolve complex California tax controversies. Ligia joined the Firm after a thirteen-year career at the California Franchise Tax Board. Ligia was the top technical resource for FTB’s Audit Branch. She had been a key participant in major policy- level decision-making with respect to FTB audit programs, litigation positions, and legislative and regulatory matters. Ligia wrote the California intercompany transaction regulation. She was also a co-author for the comprehensive California combined reporting regulations. Erin Eakes, Director, PricewaterhouseCoopers LLP 400 Capital Mall Ste. 600, Sacramento, CA 95814 Mobile: (805) 252-8308 erin.f.eakes@pwc.com Erin Eakes is a Director with PwC’s National Tax Services – SALT practice in Sacramento, CA, focusing on California franchise and income tax controversy and consulting. Erin works with taxpayers across the country to defend against California Franchise Tax Board audits, identify refund or offset opportunities in reverse income tax audits, and manage the California administrative processes with the California Franchise Tax Board and California State Board of Equalization / Office of Tax Appeals. Since joining the firm in 2012, Erin has represented taxpayers in corporate dispute resolution proceedings, both at protest and settlement, before the California Franchise Tax Board. Erin has also successfully represented clients on appeal before the California State Board of Equalization on nonbusiness income issues. Erin has experience with the California state taxation of varied business entity taxpayers across many industries and product sectors, with significant exposure to the oil and gas industry as well as to banks and financial institutions. Erin received a Bachelor of Science degree in Mathematics and Economics from University of California, Los Angeles, and a Juris Doctorate from University of California, Davis School of Law.

SLIDE 3

California Dream ing: Ta x Issues for Ohio Com p a nies Doing Business in Ca lifornia

SLIDE 4

California Market Based Sourcing

SLIDE 5

Ca lifornia Ma rket Ba sed Sourcing

Cal. Rev. & Tax Code § 25136

(a)s [F]or taxable years beginning on or after January 1, 2013, sales, other than sales of tangible personal property, are in this state if:

(1) Sales from services are in this state to the extent the purchaser of the service

received the benefit of services in this state.

(2) Sales from intangible property are in this state to the extent the property is used

in this state. In the case of marketable securities, sales are in this state if the customer is in this state.

(3) Sales from the sale, lease, rental, or licensing of real property are in this state if

the real property is located in this state.

(4) Sales from the rental, lease, or licensing of tangible personal property are in this

state if the property is located in this state. (b) The Franchise Tax Board may prescribe regulations as necessary or appropriate to carry out the purposes of this section.

SLIDE 6

Ca lifornia Ma rket Ba sed Sourcing

California’s market-based sourcing regulation (Cal. Code Regs., tit. 18, § 25136-2) applies to sales other than sales of tangible personal property.

First version of regulation established in March 2012 applied to taxpayers that made

a single-sales factor election beginning in 2011, and to all taxpayers beginning in 2013.

FTB amended the regulation on September 15, 2016 (effective for 2015 tax year but

with a taxpayer election to make the changes retroactive to 2012).

Primary changes were to add a definition of marketable securities, and provide

sourcing rules for gross receipts from dividends, goodwill, and interest.

Since the last amendment, the FTB has held four interested parties meetings (Jan.

2017; June 2017; May 2018; and July 2019) and proposed three different sets of

changes. Another round of proposed language and interested parties meeting is

expected in 2020.

SLIDE 7

Sourcing Receip ts from Sa les of Serv ices

Current regulation, with cascading rules -

RECEIPTS FROM SERVICES TO: Individuals Business Entities Benefit presumed to be received at: Customer's billing address and if the taxpayer uses this method, the FTB will accept. Presumption may be overcome by the taxpayer only. Location identified in the contracts or books & records. See Chief Counsel Ruling 2015-03, Chief Counsel Ruling 2017-01 If presumption overcome Location identified in contract or books & records. Reasonable approximation If presumption overcome Reasonable approximation Location from which customer placed order If presumption overcome Billing address

SLIDE 8

Sourcing Receip ts from Sa les of Serv ices to a Business Entity

Chief Counsel Ruling 20 15-0 3: Distinguishes location where custom er receives benefit based on whether receipts were from a m arketing or non- m arketing service

Taxpayer’s customer received benefit of service directly at its location, and indirectly at

location of its own customers (the customer’s customer).

The Ruling analogized this to sourcing receipts from intangibles, where location of

benefit depends on whether they are “marketing” or “non-marketing” intangibles

The FTB found that the services were “non-marketing” services (that the value of the

service lay not in the advertising or promoting of a product, service or other item, but in the service being used in the business operations of the direct customer).

The FTB ruled that the location of the direct customer (not the customer’s customer)

was the appropriate sourcing for the non-marketing services.

SLIDE 9

Sourcing Receip ts from Sa les of Serv ices to a Business Entity

Chief Counsel Ruling 20 17-0 1: Sourcing of Adm inistration / Outsourced Services (These are also “non-m arketing” Services)

Health plans are contractually obligated to perform a range of services to their clients.

The taxpayer managed and administered certain of these services on behalf of the health plans, with the health plan as its direct customer.

The benefit of the service was received by the health plan at its own location

where it otherwise would have had to perform the functions, and indirectly at the location of the health plan members (the customer’s customer).

The ruling reiterated that non-marketing services should be assigned to the location

where the taxpayer’s customer (the health plans) directly received the benefit of the service, and not the location of the customers’ customers (the plan members).

The ruling held that the benefit the health plans’ received from the taxpayer’s

administration services was being relieved of the obligation to perform the services for its members.

Accordingly, the benefit of that service was received by the health plans at the location

where the health plans would otherwise have been obligated to perform those services – their base of operations.

SLIDE 10

Sourcing Receip ts from Sa les of Serv ices

Proposed changes, offered in July 20 19 –

Significant changes imposing presumptions when the taxpayers’ custom ers are business entities with sourcing focused on the object of the service: a. Real property - benefit presumed to be at the location of the property; b. Tangible personal property - benefit presumed to

ccur where property is located when the service

is received unless delivered to a different location, in which case the benefit is received at the location of delivery; c. Intangible property - benefit presumed to occur where intangible property is used by the customer; d. Individuals - benefit presumed to be the location where individuals are physically present at the time the service is received. Mixed services – characterized by the object to which the service predominantly relates. No substantive changes when the taxpayers’ custom ers are individuals. The taxpayer or FTB may

vercome the presumptions

based on the taxpayer’s contracts or books and records, unless they are not available or do not provide sufficient detail, in which case all sources of information reasonably available to the taxpayer may be used.

SLIDE 11

Sourcing Receip ts from Sa les of Serv ices

Challenging Areas for Market Based Sourcing Specific Industries and Topics being debated for proposed regulation:

Government Contracting
Clinical Trials
Freight Forwarding
Sale of interests in entities

In Practice – FTB Auditors Taking Aggressive Positions

Aggressive look through to customers’ customer
Requesting massive data files for result-driven determinations

SLIDE 12

Ca lifornia Ma rket Ba sed Sourcing

Observ a tions

Ov era rching concerns

Franchise Tax Board

guidance in rulings, in examples, and in discussions during audits has not provided meaningful analysis and contains contradictions.

Nonetheless, strong themes

are emerging and the agency is signaling a less flexible mindset in its approach.

Auditors are borrowing

rules from draft regulations that have not been finalized as the rule in current audits.

New Market Sourcing Team

at the FTB – seems this team will be making decisions going forward rather than the auditors. Look-through sourcing contra d ictions

Examples in both the existing and

proposed regulation seem to favor look through sourcing to the location of an ultimate customer’s use.

However, Chief Counsel Rulings

affirm sourcing to the location of direct customers, even where ultimate customers (the customer’s customer) also benefit from the service. Dev ia ting from a 13 p ercent fa ctor (ba sed on p op ula tion) “Reasonable Approximation” (per recent proposed language): (1) U.S. population (as determined by the most recent census data) (2)If the benefit of the service is substantially received or intangible property is materially used outside of the US: use U.S. population plus the population of those foreign jurisdictions or geographic areas where the benefit of the service is being substantially received / property materially used. W ha t to exp ect Proposed regulations use language looking for the taxpayer to “substantiate the precise location” where the benefit of service is received, while relegating use of information to approximate customer location and customer benefit to the lowest tier

f the cascading rules.

SLIDE 13

Federal Tax Reform and Conform ity – California Im plications

SLIDE 14

Fed era l Ta x Reform – Ca lifornia Im p lica tions

California does not adopt the entire Internal Revenue Code (“IRC”), but instead

selectively conforms to specific IRC sections or blocks of code sections.

California conformity is further complicated by the fact that its references to the

IRC are statutorily fixed as of a certain date (currently January 1, 2015), with certain exceptions provided by California’s latest conformity bill, Assembly Bill (“A.B.”) 91, which adopts specific Tax Reform provisions.

○

Conformity to any provisions other than those specified in the new law remains as of January 1, 2015. Accordingly, there are substantial federal/state differences due to non-conformity.

Note: California did not conform to IRC § 965, and still does not conform to

GILTI, FDII, BEAT, the new 163(j) interest limitations and full expensing.

SLIDE 15

Ca lifornia A.B. 91 (20 19): K ey Prov isions

Repeal of net operating loss (“NOL”) carrybacks. For tax years beginning on or after January

1, 2019, NOLs are no longer allowed to be carried back to previous tax years.

Lim itation of like-kind exchanges to real property. Conforms to the federal elimination of

like-kind exchange treatment for exchanges of personal or intangible property, generally limiting these exchanges only to real property. The California rule applies to exchanges completed after January 10, 2019.

Technical term ination of partnerships. Conforms to the federal repeal of provisions that treats a

partnership as terminated on the sale or exchange of 50% or more of the interest in a partnership within a 12-month period. This provision is operative for tax years beginning on or after Jan. 1, 2019, but allows a partnership to elect to have this conformity apply to partnership tax years beginning after

Dec. 31, 2017, and before Jan. 1, 2019.
Elim ination of separate § 338 elections. The new provisions provide that a separate state

election shall not be allowed. In other words, the federal election controls for California purposes. This applies to acquisitions made on or after the effective date of the bill (July 1, 2019) but does not apply in the case of an acquisition subject to a binding contract entered into before that date.

Elim ination of Exception for Perform ance-Based Com pensation. Conforms to amended

IRC § 162(m) to eliminate the exception for qualified performance-based compensation from the definition of “compensation” subject to the $1M deduction limitation. California modifies the “written, binding contract” grandfathering date contained in the federal statute to March 31, 2019.

SLIDE 16

Unique Issues Related to Foreign Activities

SLIDE 17

Ca lifornia Ta x Im p a ct of Rep a tria tions

As a result of the 2018 toll charge (IRC § 965) many companies are bringing money back

into the U.S. from overseas.

For federal purposes, such dividends are “previously taxed income” or “PTI” and are

not subject to tax to the extent already taxed under IRC § 965.

However, the repatriation distributions are subject to tax in California.
The impact of the repatriation of profits in California must be considered through the lens
f worldwide v. water’s-edge filing.
On a w orldw ide basis, designation of amounts as Subpart F would have no impact on

the worldwide return and subsequent distributions in the nature of dividends would generally be subject to elimination if received from a unitary affiliate.

Exceptions would include:
Acquired entities with “pre-unitary” earnings and profits (“E&P”)
Taxpayers that previously filed on a water’s-edge basis, dividends paid

from prior year water’s-edge E&P layers when CFCs were not included in the California combined report.

On a w ater’s-edge basis, designation of amounts as Subpart F, and distributions, are

subject to California-specific treatment.

SLIDE 18

Ca lifornia Ta x Im p a ct of Rep a tria tions – W a ter’s-Ed ge Filers

Unitary CFCs are subject to partial inclusion in the water’s-edge group based on their

inclusion ratio – the ratio of IRC § 952 Subpart F income to current year E&P.

Actual distributions in the nature of dividends are drawn from E&P on a last in, first out

(“LIFO”) layering basis:

Elimination of the dividend from income and from apportionment to the extent of

previously included unitary E&P for each year, then

Application of a 75 % water’s-edge dividends received deduction (“DRD”) for the

portion of the dividend not distributed from previously included unitary E&P, and

To the extent a DRD is applied, the benefit of the deduction is then eroded through

interest offset provisions for debt that California attributes to foreign investment.

Water’s-edge filers may face additional complexities if they have CFCs with varying

inclusion ratios and tiered entity structures.

Factor considerations – how much of the dividend received goes into the sales factor?
The FTB has indicated that only the net value of a dividend - net of the dividends

received deduction - goes into the sales factor. (See Legal Ruling 2006-01)

However, in Microsoft in October 2006, the California Supreme Court affirmed

that all gross receipts should go in the sales factor.

SLIDE 19

Additional California Issues and Opportunities

Franchise Tax Controversies
Tax Credits and Incentives Opportunities
Local Taxes

SLIDE 21

Fra nchise Ta x Controv ersies

Increasingly Long Timetable to Resolution with Franchise Tax Board
Audits requesting multiple years of SOL waivers
Legal department and settlement bureau, understaffed but have a heavy case load –

timetable for resolving protests extended to three years.

New Franchise Tax Board Committees (Distortion, Market Sourcing, etc)
The agency is creating new committees to promote consistency, but which add levels
f review and are mostly a black box to taxpayers
OTA decision In re Robert Half – VAT on services included in California sales factor
Overturned longstanding FTB position

SLIDE 22

Ta x Cred its a nd Incentiv es

 California Competes Credit – tax credits to retain or attract new business activity in California, administered by the Governor’s Office of Business and Economic Development  Credits are available for allocation during various application periods – next application period is March 9, 2020 through March 30, 2020  California Credit Assignment  The FTB allows assignment of credits but imposes substantial restrictions and is particular about proper assignment  The election to assign is irrevocable and required to be made on an

riginal return

 FTB position that credits generated by disregarded entities will not be usable by an assignee if they are assigned (Technical Advice Memorandum 2018-01).  California does not conform to the federal Opportunity Zone Program  Something to look out for when preparing California returns, the Opportunity Zone benefit needs to be reversed

SLIDE 23

Loca l Ta xes

 San Francisco Local Taxes – Recent Expansion of Business Taxes  Gross Receipts Tax  Apportionment methodology for determining San Francisco gross receipts depends on type of business, but can be based entirely on a San Francisco payroll ratio, actual San Francisco sales, or both.  Tax rate also differs based on business classification.  Homelessness Gross Receipts Tax  Imposes additional tax on San Francisco gross receipts over $50 million  Payroll Expense Tax  Supposed to be phased out but GRT did not collect expected revenue, so payroll tax remains indefinitely at the 2018 rate of 0.38% on all forms of compensation paid to individuals within San Francisco.  Commercial Rents Tax  Imposes a 3.5% tax on rentals of ‘commercial space’ in the city  Other recently proposed taxes to watch for – “IPO Tax” and “CEO Tax”  Los Angeles County Business License Taxes  Includes Los Angeles City Business Tax  Other city taxes imposed in Beverly Hills, Culver City, Santa Monica