FOR LIVE PROGRAM ONLY Composite Returns and Nonresident Withholding for Pass-Through Entities: Navigating the Multistate Complexities TUESDAY , MAY 1, 2018, 1:00-2:50 pm Eastern IMPORTANT INFORMATION FOR THE LIVE PROGRAM This program is approved for 2 CPE credit hours . To earn credit you must: • Participate in the program on your own computer connection (no sharing) – if you need to register additional people, please call customer service at 1-800-926-7926 ext.1 (or 404-881-1141 ext. 1). Strafford accepts American Express, Visa, MasterCard, Discover . • Listen on-line via your computer speakers. • Respond to five prompts during the program plus a single verification code . • To earn full credit, you must remain connected for the entire program. WHO TO CONTACT DURING THE LIVE EVENT For Additional Registrations : -Call Strafford Customer Service 1-800-926-7926 x1 (or 404-881-1141 x1) For Assistance During the Live Program : -On the web, use the chat box at the bottom left of the screen If you get disconnected during the program, you can simply log in using your original instructions and PIN.
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Notice ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY THE SPEAKERS’ FIRMS TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN. You (and your employees, representatives, or agents) may disclose to any and all persons, without limitation, the tax treatment or tax structure, or both, of any transaction described in the associated materials we provide to you, including, but not limited to, any tax opinions, memoranda, or other tax analyses contained in those materials. The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.
Composite Returns and Nonresident Withholding for Pass-Through Entities May 1, 2018 William Brown Jeff Weinkle, CPA Brown Winick State & Local Tax Manager (515) 242-2412 Aprio LLP brown@brownwinick.com (770) 353-3071 jeff.weinkle@aprio.com 4
Business Tax Preparation Landscape • Major shift over the past 30 years in the types of business tax returns prepared, because of: – Federal tax reform in the 1980’s that inverted the relative corporate and individual tax rates – General Utilities repeal – “Check the box” entity classification rules – Change in Subchapter S eligibility rules – Emergence of limited liability companies in 1990’s – Growth of robust computer tax preparation software and ability to easily prepare multistate returns with numerous owners 5
What are the stakes? • Audit adjustments on entity returns affect tax liabilities of owners • Impact on tax preparers • Effect of new partnership audit rules • States hungering for more tax dollars, particularly from out of state businesses 6
Constraints on State Taxation of Multistate Businesses • Due Process Clause of the 14 th Amendment – Source of apportionment requirements • Commerce Clause of U.S. Constitution – “Dormant” commerce clause • P.L. 86-272 – Applies to sales of goods only – Not as broad an exemption as commonly viewed 7
Case History • National Bellas Hess, Inc. v. Department of Revenue 385 U.S. 753 (1967) • Complete Auto Transit, Inc. v. Brady 430 U.S. 274 (1977) • Moorman Mfg. Co. v. Bair (1978) • Quill Corp. v. North Dakota 504 U.S. 298 (1992) • Wisconsin Department of Revenue v. William Wrigley, Jr. (1992) 8
State of South Dakota v. Wayfair • Response to dicta from justices in U.S. Supreme Court regarding Quill decision • 2016 South Dakota statute • Declaratory judgment action by state • Summary judgment motion by Wayfair • State appeal to South Dakota Supreme Court • Certiorari to U.S. Supreme Court granted; case argued on April 17, 2018 9
Why Wayfair? • Justice Kennedy dicta in Direct Marketing Association v. Brohl (2015) • Justice Thomas dicta in Comptroller v. Wynne (2015) • Judge Gorsuch dicta in 10 th Circuit decision in Direct Marketing Association v. Brohl (2016) 10
Nexus • Physical presence – National Bellas Hess; Quill • Agency nexus – Scripto, Tyler Pipe • Affiliate nexus – SFA Folio Connections; Borders Online • Click through nexus – Amazon • Economic nexus – MBNA; Capital One • Licensing nexus – Geoffrey; KFC 11
Allocation and Apportionment • Allocation – principally regarding real estate income, personal services income or investment income of residents • Apportionment – all other types of income 13
Apportionment • Three factor – sales, property, payroll • Single factor – sales only • Modified three factor – double weighting of sales • Special apportionment approaches for specific businesses, particularly transportation and utility businesses 14
Methods of Enforcement • Alternative taxes – Franchise taxes – Gross receipts taxes • Nonrecognition of pass-through status; required C corporation treatment • Withholding requirements • Loss of qualification to do business in state and to access court system 15
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Withholding • Income base for withholding – Pass through income – Distributions • Withholding rate • Alternatives to withholding – Submission to jurisdiction of state and agreement to file nonresident return – Composite state filing by business on behalf of nonresident owners – Estimated tax payment requirements 19
Nonresident Withholding • 33 states require withholding on certain nonresident partners • Applicability & rates depend on type of owner • How do states define “nonresident” for individual persons and business entities? • Basis of Tax: – Distributive share of apportioned/allocated state income – Actual distributions • Owner files state return to claim payments against tax/obtain refunds 20
Withholding Exemptions/Opt-Out • Rules may vary between partnerships and S-corporations • Possible exemptions: – De minimis threshold – Exemption Forms or Affidavits: owner consents to state taxation – Participation in Composite/Group tax return – Exempt entities, investment/publicly traded partnerships, etc. 21
Common Withholding Problems • Withholding may not be reflective of ultimate tax liability – Issues with multi-tiered entities – Net Operating Losses • Owner may have to make separate estimated tax payments if withheld amount is insufficient to cover liability • As partnership enters new states, distribution/guaranteed payment agreements with owners may need to be modified 22
Composite Returns • Single group return filing on behalf of nonresident owners • Eliminates need for owner to file separate state return • Administrative convenience vs. lower tax liability • Calculation of tax: – Typically computed by multiplying owner’s share of income apportioned/allocated to state by the highest marginal tax rate – Some states provide alternative calculation options • Which entities can file? – State approval may be required – Minimum number of participants may be required 23
Composite Returns • Which owners can participate? Typical requirements may include: – Nonresident for entire tax – Does not maintain permanent place of abode in state – The owner’s only source of state income comes from this pass -through entity (or other PTEs where composite returns are filed) – Same tax year as PTE or other owners • What about disregarded entities? 24
Mechanics - Required Information from Owners • Entity type – how is the owner taxed? • Is the owner a resident/nonresident of each state? • Does the owner have a withholding exemption? • Is the owner eligible to participate in the composite return? • If eligible, does the owner choose to participate in the composite return? • Has partnership/S-corporation collected the appropriate forms/affidavits? • Annual election memo to owners strongly recommended 26
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