The 5th Annual NMTRI Tax Policy Conference May 1-2, 2008 Joe - - PowerPoint PPT Presentation

The 5th Annual NMTRI Tax Policy Conference

May 1-2, 2008

Joe Huddeston, Executive Director Multistate Tax Commission, Washington, DC

Agenda/Contents

• MTC Updates
• Federal Legislation on State Tax Issues

MTC Update

Multistate Tax Commission: What’s New

• New MTC Chair: Omar Davis (Minnesota)
• MTC membership update: Georgia, Maryland, and West Virginia become

sovereignty members for 2007-08

• Joint audit program: Georgia and Illinois join, and two additional MTC audit

staff positions created. Proposed assessments for FY07 total over $62 million.

• National nexus program: contracts entered with 81 taxpayers; over $11.9

million collected in FY07. Tom Shimkin as new national nexus program director.

• Multistate Voluntary Compliance Program (VCP) for abusive transactions

ended October 1, collected $21.8 million for 23 participating states

• New “MOU” with the IRS

MTC Uniformity Projects: Adopted

Uniformity projects adopted as recommendations to the states in 2006:

• Combined Reporting Model Statute
• Basis for West Virginia’s 2007 enactment of unitary combined

reporting with expanded water’s edge

• Related Party Expense Addback Model Statute
• Reportable Transactions Disclosure and Voluntary Compliance Program

(VCP) Model Statutes

• State Filing Position Model Statute; i.e., “Compilation of State Tax Return

Data”

• Filing method in development

MTC Uniformity Projects: Adopted

Uniformity projects adopted as recommendations to the states in 2007:

• Third-party Cost of Performance (COP)
• Removes language from the definition of “income producing activity”

(“IPA”) that requires that the transaction or activity be “directly” engaged in by the taxpayer

• IPA includes transactions and activities performed “on behalf of” the

taxpayer, such as those conducted on its behalf by an independent contractor

• Amends the definition of “cost of performance” to include a taxpayer’s

payments to an agent or independent contractor for the performance of “personal services” and “utilization of tangible and intangible property” that give rise to the particular item of income

MTC Uniformity Projects: Adopted

• Third-party Cost of Performance (COP) (continued)
• Also provides a “hierarchy of rules” with respect to attribution of IPA to a

state

• Where the taxpayer cannot reasonably determine where the IPA is

actually performed, use the location of performance designated in the contract between the taxpayer and the agent/independent contractor

• The next default is the location of performance indicated in the

contract between the taxpayer and its customer

• The final default is the domicile of the taxpayer’s customer
• “Throw-out” rule: the IPA of the agent/independent contractor is

disregarded if the IPA is in a state in which the taxpayer “is not taxable”

MTC Uniformity Projects: Proposed

• Proposed special industry apportionment regulation for

“telecommunications and ancillary service providers”

• Imports definitions used by the Streamlined Sales and Use Tax

Agreement

• Generally, attempts to move to a “market” sourcing approach in place of

cost of performance

• Sticking points include how to apply “market” theory to “wholesale”

telecom sales

MTC Uniformity Projects: Proposed

• Proposed captive REIT DPD disallowance statute
• Requires addback of the dividends paid deduction otherwise allowed by

federal law in computing net income of a “captive” real estate investment trust (REIT)

• Captive REIT determination based on 50% ownership, where the

shares or beneficial interests of the REIT are not regularly traded on an established securities market

• Certain exceptions, including ownership by another (non-captive) REIT

MTC and NCCUSL: Potential Overhaul of UDITPA

• Although the MTC is pursuing special industry apportionment regulations, it

requested that NCCUSL (which drafted UDITPA) review Sec. 17 in its entirety

• In response, NCCUSL has established a drafting committee
• However, NCCUSL’s review could go much broader, to a complete

UDITPA overhaul

• The MTC will continue to develop proposed changes to Sec. 17, but will

undertake a broader review in conjunction with NCCUSL

Potential MTC Projects for Future Development

• Special sourcing/nexus rules for IHCs
• Model statute for regulated investment companies (RICs)
• Revisions to financial institutions apportionment rules
• Amendment of UDITPA Sec. 18 to “expand permissible application of

equitable apportionment formulas”

• Simplifying telecommunications transaction taxes
• Reporting for Federal RARs

MTC Uniformity Projects: Sales Tax

• Sales tax projects
• Largely deferred in light of ongoing work of Streamlined Sales Tax (e.g.,

sourcing of services)

• Hotel intermediaries
• Model statistical sampling statute and regulation

Federal Legislation on State Tax Issues

The 2009 Budget Revenue Individual Income Tax $1,260 Social Security $949.40 Corporate Income Tax $339.20 Excise Tax $68.90 Customs Duties $29.10 Estate and Gift Taxes $26.30 Other $47.90

$0 $500 $1,000 $1,500 $2,000 $2,500 $3,000 Dollars in Billions

The 2009 Budget

Other $47.90 Estate and Gift Taxes $26.30 Customs Duties $29.10 Excise Tax $68.90 Corporate Income Tax $339.20 Social Security $949.40 Individual Income Tax $1,260 Revenue

The 2009 Budget Expenditures Nat'l Defense $670.70 Social Security $644.00 Medicare $408.00 Other Mandatory $360.00 Interest on Debt $260.00 Medicare and SCHIP $224.00 Transport ation $81.50 Education and Training $81.50

• Admin. Of

Justice $48.40 Veteran's Benefit $44.40 Foreign Affairs $40.50 Nat'l Resource s $35.20 Science and Tech. $29.00 Comm. And Reg. Devel. $23.50

• Gen. Gov

$18.70 Agric. $6.10 Energy $4.70

$0.00 $500.00 $1,000.00 $1,500.00 $2,000.00 $2,500.00 $3,000.00 Energy $4.70 Agric. $6.10

• Gen. Gov

$18.70

• Comm. And Reg. Devel.

$23.50 Science and Tech. $29.00 Nat'l Resources $35.20 Foreign Affairs $40.50 Veteran's Benefit $44.40

• Admin. Of Justice

$48.40 Education and Training $81.50 Transportation $81.50 Medicare and SCHIP $224.00 Interest on Debt $260.00 Other Mandatory $360.00 Medicare $408.00 Social Security $644.00 Nat'l Defense $670.70 Expenditures

Congressional Landscape: 110th Congress (2007-08)

• Democratic majorities in both House and Senate for first time since 1994

elections

• Key committee assignments made
• Senate Finance: Sen. Baucus (D-MT) is Chairman
• Senate Commerce: Sen. Inouye (D-HI) is Chairman
• House Judiciary: Rep. Conyers (D-MI) is Chairman
• Commercial and Administrative Law Subcommittee: Rep. Sanchez

(D-CA) is Chairwoman

• New leadership, committee members create need to rebuild support
• Loss of committee chairmanships for key proponents / opponents on

certain issues

• Presidential election year in 2008 produces short time window

Internet Tax Freedom / Nondiscrimination Act

• Multiple bills (H.R. 743, H.R. 1077, S. 156, S. 2128) introduced to make

the “Internet Tax Freedom Act” (“ITFA”) permanent (bars state and local Internet access taxes and multiple and discriminatory taxes on e- commerce)

• Ultimately, compromise legislation (H.R. 3678) was passed by Congress

and signed by President Bush on October 31 – one day before the November 1, 2007 scheduled expiration date of ITFA

• Seven-year extension, until November 1, 2014
• “Grandfathered” states retain right to tax Internet access
• Addresses taxation by some states of telecommunications used to

provide Internet access

• Amendments to “Internet access” definition
• Clarifies which taxes are covered by ITFA

• 109th Congress -- H.R. 1956 passed by House Judiciary Committee on

6/28/06, but a House vote scheduled for 7/25/06 was cancelled

• 110th Congress
• S. 1726 (referred to Finance Committee, 6/28/07)
• H.R. 5267 (referred to Judiciary Committee, 2/7/08)
• Deletes several of the safe harbors found in the prior legislation, while

retaining the core principles of “updating” P.L. 86-272 and “codifying” a physical presence nexus standard

Nexus: Business Activity Tax (“BAT”)

Nexus: Business Activity Tax (“BAT”)

• “Update” of P.L. 86-272
• Would extend P.L. 86-272 protections:
• To all BAT, not just net income taxes
• To all “sales” and “transactions,” not just to sales of TPP
• To specified “business activities,” (such as business activities

directly related to the taxpayer’s potential or actual purchase of goods or services within the state)

• BAT nexus standard codified
• “Physical presence,” with a 14-day de minimis threshold (was 21 days

under prior legislation)

• “Limited or transient business activity” does not count toward the

physical presence threshold

Nexus: Sales and Use Tax / Streamlined Sales Tax (“SST”)

• S. 34, introduced, referred to Finance Committee, 5/22/07
• Nearly identical to legislation introduced in 2005 by Sen. Enzi, except

for recognition of Indian Tribes under certain circumstances

• “Small seller” exception – the key difference between Sen. Enzi’s and
• Sen. Dorgan’s bills in the 109th Congress – remains to be resolved
• H.R. 3396, introduced 8/3/07, hearing held, Judiciary Commercial and

Administrative Law Subcommittee, 12/6/07

• Nearly identical to S. 34, without Indian Tribes language
• Co-sponsored by Rep. Conyers, Chairman of Judiciary Committee
• Generally, the legislation would allow states that comply with minimum

simplification requirements and become SST member states to require sales and use tax collection on “remote sales”

• Besides small seller exception, issues at the federal level include:
• Telecom tax simplification requirements
• “Origin” v. “destination” sourcing
• “Governance”/Federal oversight

Nonresident Withholding

• H.R. 3359, introduced, referred to House Judiciary, 8/3/07; Commercial

and Administrative Law Subcommittee hearing held, 11/1/07

• Income tax withholding/personal income tax reporting would apply to

wages or other remuneration paid as of the commencement date of duties in the non-resident state/locality for the year, once a 60-day threshold is passed

• Absent an existing time and attendance system that tracks employees’

whereabouts on a daily basis, employers may rely on the employee’s determination of the time expected to be spent in the states/ localities in which the employee will perform duties

• Professional athletes, entertainers, and “certain public figures” are

excluded from the term “employee,” and thus are not covered by the legislation

“Convenience of the Employer” Test

• H.R. 1360, introduced, referred to Judiciary Committee, 3/6/07; S. 785,

introduced, referred to Finance Committee, 3/6/07

• Would bar states and localities from imposing income tax on the

compensation of nonresident individuals “with respect to any period of time when such nonresident individual is physically present in another State”

• No state may deem a nonresident to be present in or working in the state on

the grounds that the nonresident is present at or working at home "for convenience"

• Legislation would not affect the taxation of corporations, partnerships, or LLCs,
• r the taxation of individuals in their capacities as shareholders, partners, or

members or managers of LLCs

• Also H.R. 2242, introduced, referred to Judiciary, 5/9/07
• Less detailed than H.R. 1360/S. 785, the bill provides that a state "may not

impose a tax on the income earned... by nonresidents unless the tax is of substantial equality of treatment for the citizens of the State and the nonresidents so commuting”

Nonresident Retired Partner Taxation

• 109th Congress – H.R. 4019, signed into law on 8/3/06
• Generally, extends to nonresident retired partners existing protections

against state taxation of a nonresident’s retirement income

• P.L. 104-95 was enacted in 1996 to bar a state from imposing income

tax on “any retirement income of an individual who is not a resident or domiciliary of such State“

• New York had claimed that P.L. 104-95 only applied to nonqualified

deferred compensation retirement income of employees, not partners

• The legislation applies retroactively to amounts received after

December 31, 1995

“Cuno”: State Credits and Incentives

• 109th Congress – S. 1066, H.R. 2471 (introduced 5/18/05)
• Hearings held in Senate Finance, House Judiciary Subcommittees
• 110th Congress – S. 914 (introduced, referred to Finance Committee,

3/19/07)

• The legislation is substantially unchanged from the 109th Congress
• Would authorize states to provide tax incentives for economic

development purposes, and provide that such tax incentives do not impermissibly discriminate against interstate commerce

• Push to enact blunted by U.S. Supreme Court decision in Cuno (rejecting

challenge to Ohio ITC on procedural grounds)

“Discrimination” Relief

• Cell Phones
• H.R. 436, S. 166 would create a 3-year ban on any "new discriminatory tax
• n... mobile services, mobile services providers, or mobile services property”
• Direct Broadcast Satellite
• H.R. 3679 would provide that no state may impose a "discriminatory tax" on

any means of providing multichannel video programming distribution services

• Motor vehicle rentals
• H.R. 2453 would “protect consumers from discriminatory state taxes on motor

vehicle rentals”

• No state or locality would be allowed to levy or collect a discriminatory tax on

the rental of motor vehicles, the business of renting motor vehicles, or motor vehicle rental property

• Natural gas pipeline property
• H.R. 2230 would bar states and localities from imposing a tax "that

discriminates against a natural gas pipeline" that is subject to the jurisdiction

• f the Federal Energy Regulatory Commission

Questions?