Ohio Tax International Companies with U.S. Activities Multistate - - PDF document
27th Annual Tuesday & Wednesday, January 2324, 2018 Hya Regency Columbus, Columbus, Ohio Workshop O Ohio Tax International Companies with U.S. Activities Multistate Considerations for Inbound Companies Tuesday, January 23, 2018
27th Annual
Tuesday & Wednesday, January 23‐24, 2018
Hya Regency Columbus, Columbus, Ohio
International Companies with U.S. Activities … Multistate Considerations for Inbound Companies
Tuesday, January 23, 2018 3:00 p.m. to 4:00 p.m.
Biographical Information
Curtis Ruppal, CPA, Partner, State & Local Tax Group Plante & Moran, PLLC 634 Front Ave, NW, Suite 400, Grand Rapids, MI 49504 616.643.4069 Fax: 248.233.9000 curtis.ruppal@plantemoran.com Curtis is the practice area leader for the firm’s State and Local Tax Group and serves as the Tax Director for the Grand Rapids and St. Joseph offices. He specializes in providing clients with multistate tax consulting services, including implementation of solutions to minimize income and franchise taxes, sales and use taxes, property taxes, and other state and local taxes. He also provides taxpayer representation in state and local tax audit and controversy proceedings. Curtis has over 25 years of tax and accounting experience serving middle-market, both closely held and private equity owned, and Fortune 500 companies. He has experience with a variety of industries, including manufacturing, distribution, transportation, business and professional services, technology, retail, construction and real estate. Prior to joining Plante Moran in 2001, he spent several years with a national accounting firm, as well as time with a large manufacturing company in the tax and corporate finance areas. Curtis is a member of the American Institute of Certified Public Accountants and the Michigan Association of Certified Public Accountants and its State and Local Tax Task Force. He is a member of the Michigan Chamber of Commerce Tax Policy Committee, where he previously served as Chair and Vice Chair, and is also a member of the Grand Rapids Chamber of Commerce Tax Policy Committee. Curtis received his bachelor of business administration degree in accountancy from Western Michigan University. Doug A. Hummer, CPA, Tax & Compliance Manager Chromaflo Technologies Corp. 2600 Michigan Ave., Ashtabula, OH 44004-3140 440-997-5137 dhummer@chromaflo.com Since July 2015, Doug Hummer has served as the tax and compliance manager at the Ashtabula, Ohio, site. He is responsible for the company’s tax compliance, tax planning and accounting for income taxes. Doug is a certified public accountant and holds a bachelor’s degree in accounting and finance. He most recently served as business consultant for various organizations across the U.S. Doug has a strong tax background at various multi-national companies, as well as a robust educational background and certification.
Biographical Information
David M. DeCew, CPA, MST, Senior Manager, State & Local Tax Group, Plante & Moran, PLLC, 1098 Woodward Avenue, Detroit, MI 48226 313.496.7297 Fax: 248.233.8820 dave.decew@plantemoran.com David is the firm’s state and local tax resource for the Detroit, Auburn Hills, and Macomb offices. He specializes in providing clients with multistate tax consulting services, including implementation of solutions to minimize income and franchise taxes, sales and use taxes, property taxes, and other state and local taxes. He also provides taxpayer representation in state and local tax audit and controversy proceedings. David has over 10 years of tax and accounting experience serving middle-market and Fortune 500 Companies. He has experience across a variety of industries, including manufacturing, transportation, business and professional services, entertainment, retail, restaurant, and healthcare. David also applies his expertise working on mergers and acquisitions, performing buy and sell side due diligence services to his private equity fund clients. Prior to joining Plante Moran in 2008, he spent several years with an international accounting firm. David received his bachelor of science in accounting from Oakland University, and his masters of science in taxation from Walsh College.
International Companies with U.S. Activities . . . Multistate Considerations for Inbound Companies
Presented by: Curtis Ruppal, Plante Moran Dave DeCew, Plante Moran Doug Hummer, Chromaflo Technologies
taxable income X state income tax rate
state franchise tax rate
rate (i.e. Ohio CAT, Washington B&O)
sales tax rate
in the state
Defined by treaty with specific country, but generally
enterprise is wholly or partially carried on, including
X months
and habitually exercises authority to conclude contracts
Often excluded from permanent establishment are:
inventory
another party
purchasing goods or collecting information
What is Nexus?
before a state can impose taxes Income tax nexus differs from sales tax nexus
requirement
Federal law prohibits states and cities from imposing a net income tax
connection is solicitation of sales of tangible personal property
PL 86‐272: General Rule
(non‐U.S.) corporations
Activities exceeding PL 86‐272 federal immunity generally include…
home office
control, collections, installations)
(varies state by state) vs. common carrier
States that extend PL 86‐272 to foreign commerce:
AK, AR, FL, IN, IA, LA, MD, MA, MO, NE, NM, NY, NC, ND, OR, PA, RI, WV
States that indicate PL 86‐272 DOES NOT apply to foreign commerce:
CO, DE, DC, KS, MN, MS, NJ, TN
Economic Nexus and Factor Presence Nexus
the state
specific minimum dollar amount of sales sourced to the state (factor presence may also be created by minimum threshold of property or payroll)
digital goods
not apply to foreign co.
Nexus for Sales Tax: Physical Presence!?
requirements on out‐of‐state vendors lacking physical presence (Quill Corp. v. North Dakota, 1992)
– Solicitation of sales in‐state by employees , independent contractors, affiliates – Deliveries in company owned vehicles or backhauling property – Occasional visits by sales persons or other personnel – Trade Shows (limitations) – Fulfillment centers and warehouses – Servers an/or hosted websites – Agents and affiliates performing in‐state services for you – Consigned inventory & vendors managed inventory – Warranty work
Lawmakers are finding new ways to impose sale tax collection on
nexus
976)
income/franchise tax
– Rates generally range from 1% to 12%
– Tax base is generally apportioned capital or net worth – Rates generally range from $1.50‐$3.00 per $1,000 of tax base
separate reporting
Federal Taxable Income Base +/‐ State Modifications = Apportionable State Income x Apportionment Percentage = State Taxable Income x State Tax Rate = State Tax Amount
– The starting point for the computation of taxable income is the amount of "federal taxable income" calculated pursuant to the Internal Revenue Code on the corporation's federal tax return, before (or after) net operating loss but after the federal dividends received deduction. This figure is the actual amount filed on Line 30 (or Line 28), Federal Form 1120.
income tax purposes, whether or not they have “nexus” in such states generally becomes a moot point as they lack a reported federal taxable income starting point from a filed Form 1120 or 1120F for state income tax purposes.
NOT ALL STATES ARE EQUAL New Jersey “Entire net income shall mean total net income from all sources, whether within or without the United States, and shall include the gain derived from the employment of capital or labor, or from both combined, as well as profit gained through a sale or conversion of capital assets. For the purpose of this act, the amount of a taxpayer’s entire net income shall be deemed prima facie to be equal in amount to the taxable income… which the taxpayer is required to report…or would otherwise be required to report to the United States Treasury Department for the purpose
NOT ALL STATES ARE EQUAL Massachusetts "Gross income“ means gross income as defined under the provisions of the federal Internal Revenue Code, as amended and in effect for the taxable year, plus the interest from bonds, notes and evidences of indebtedness of any state, including this commonwealth; provided, however, that gross income of corporations taxable …., in addition to the foregoing, include a deduction for losses from the sale or exchange of capital assets sustained during the taxable year to the extent allowable by the federal Internal Revenue Code. [§ 30(3), Ch. 63, Mass. G.L.] “Gross income” definition is NOT contingent as to whether or not the corporation has a taxable income starting point from a filed federal income tax return.
NOT ALL STATES ARE EQUAL Michigan Notwithstanding any other provision of this part to the contrary, a foreign person subject to tax under this part shall calculate its corporate income tax base under this section. Except as otherwise provided in this section, the corporate income tax base of a foreign person is subject to all adjustments and other provisions of this part. However, the corporate income tax base shall not include net income from sales of tangible personal property where title passes
But wait . . . subnational reciprocity exemption for foreign persons from a NAFTA country [MCL §206.625(1)(c)]
NOT ALL STATES ARE EQUAL New York Taxable years beginning before January 1, 2015: Federal taxable income is adjusted by adding: in the case of a taxpayer organized
without the United States less all allowable deductions attributable thereto, which were not taken into account in computing Federal taxable income. [NYCRR 20 §3‐2.3(a)(9)] Taxable years beginning on or after January 1, 2015: Taxable income includes: in the case of an alien corporation that under any provision of the internal revenue code is not treated as a “domestic corporation” as defined in section seven thousand seven hundred one of such code is effectively connected with the conduct of a trade or business within the United States as determined under section 882 of the Internal Revenue Code. [NY Tax Law §208(9)(iv)]
Federal Taxable Income Base +/‐ State Modifications = Apportionable State Income x Apportionment Percentage = State Taxable Income x State Tax Rate = State Tax Amount
management fees
credits
election) and federal wage credits (i.e. WOTC, WTW)
Federal Taxable Income Base +/‐ State Modifications = Apportionable State Income x Apportionment Percentage = State Taxable Income x State Tax Rate = State Tax Amount
What percentage of a company’s income may the state tax? Total Apportionable State Income ‐ separate of combined? x Apportionment Percentage* ‐ using state’s method =Apportioned Business Income
Planning opportunity: Consider state apportionment rules when locating or expanding your business
Traditional 3‐Factor Apportionment Formula
sales factor
and payroll
state sales
In‐state Sales Total Sales y In‐state Payroll Total Payroll p y In‐state Property Total Property 3
What is included and where is it sourced?
What is included and where is it sourced? Sale of Tangible Personal Property: Sourced to destination state “Throwback rule”: If seller not taxable in destination state, sales are “thrown‐back” and sourced to state goods were shipped
from
Apportionment – Sales Factor What is included and where is it sourced?
Sale of Services or Other than Tangible Personal Property:
greater or pro‐rata amount of “income producing activity” is performed
customer receives benefit of the service
sales.
MD, MA, MI, MN, MO, MT (2018), NE, NY, OH, OK, OR (2018), PA, RI, TN, UT, WA, WI
Apportionment Formulas – Special Industries
space)
Each business entity with state nexus is treated as a separate taxpayer Separate filing states (generally) include: Northeastern : DE, MD,NJ, PA Southeastern : AL, AR, FL, GA, KY, LA, MS, NC, SC, TN, VA Midwest: IN, IA, MO West: OK Trend: More states are disallowing related‐party expenses to prevent shifting income to low‐tax jurisdictions.
Businesses part of a “unitary” group file a combined tax return. ‐ Characteristics of a “unitary” business: ‐ Contribution & dependency ‐ Strong centralized management ‐ Economies of scale/flow of goods ‐ Intercompany transactions ‐ May include non‐U.S. affiliates owned > 50% Trend: More states requiring combined reporting in order to increase their tax base and/or prevent income shifting
Worldwide Water’s-Edge Entities Included All corp entities owned > 50% Limited to US based plus
connection Income All domestic and foreign income Domestic plus inbound foreign income Apportionment All domestic and foreign income Domestic plus inbound foreign income Dividends Repatriated amounts eliminated to extent of E&P Repatriated amounts DRD and limited elimination Election Default in limited states; Elective in others Original return – min. year duration
45 states and District of Columbia impose a general Sales and Use Tax
Oregon Average rates range from 4%‐10% Tax is usually imposed on buyer, but seller is required to collect it Local Tax Home Rule vs. Non‐Home Rule Non‐home rule (general rule):
sales taxes Home rule:
their own sales tax
What is taxable? In general, all sales of tangible personal property are subject to sales tax: – Exemptions may apply (varies by state) – Other transactions/products may also be subject to sales tax (varies by state):
Common types of exemptions: – Sale for resale – avoids pyramiding of tax through supply chain – Based on use: machinery for manufacturing – Based on purchaser: charitable organization, federal government – Based on product: food, prescription drugs – Other: occasional or casual sales
Primary revenue source for local governments Rates generally range from 1%‐5% of tax base Taxable Property – All forms of realty: land, personal residences, apartment buildings, offices, factories, etc. – Selected types of tangible personal property (varies by state) – Inventory is generally exempt Tax Base – Based on FMV (realty) or depreciated cost (personal) – Assessed value on specified date (e.g., lien date)
Withholding Tax
2017 (H.R. 1393) Unemployment Tax
industry (1% ‐ 6%)
State Transfer Pricing Considerations
Several types of intercompany transactions can result in the movement of state income tax liabilities:
Many states have statutes that adopt or are substantially similar to IRC § 482 States have some traditional remedies available to them other than arm’s‐length adjustments –
related party that appears to have received a disproportionate amount of income from the corporation filing in their state
deduction was created through transactions with a related party
State Taxation of Non‐U.S. Businesses
Activity
filing obligation
does not maintain a permanent establishment in that state
Treaties
a non‐U.S. company from state income taxation
Selection of Entity Type
State of Incorporation or Organization
allowed by management and officers
The Tax Foundation maps included herein may be found at: https://taxfoundation.org/state‐corporate‐income‐tax‐rates‐ brackets‐2017/ https://taxfoundation.org/state‐levy‐capital‐stock‐tax/ https://taxfoundation.org/state‐and‐local‐sales‐tax‐rates‐ midyear‐2017/ https://taxfoundation.org/trends‐state‐tax‐policy‐2018/ https://taxfoundation.org/does‐your‐state‐tax‐business‐ inventory/ The maps included in this presentation are original productions and have not been altered.
This presentation contains general information only and the respective speakers and their firms are not, by means of this presentation, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This presentation is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. The respective speakers and their firms shall not be responsible for any loss sustained by any person who relies on this presentation.